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THE 


POLITICAL  ECONOMY 

>  J  3  )  i  '  '   3    i  >      on     >  ' 

OP 

GREAT  BRITAIN,  THE  UNITE])  STAtES, 
AND  FRANCE, 


IN  THE 


USE  OF  MONEY. 


A  NEW  SCIENCE  OF  PRODUCTION  AND  EXCHANGE. 


BY 

J.  B.  HOWE. 


Money  cannot  be  separated  from  its  use ;  because,  if  separated,  it  ceases 
to  be  money.  Bank  debt  is  the  record  of  production  by  the  aid  of  bank 
loans,  and  bank  reserve  is  the  record  of  the  exchanges  for  consumption  of 
the  things  produced  by  the  aid  of  bank  loans.  Therefore  bank  reserve  and 
bank  debt  ought  to  be  kept  in  as  steady  a  ratio  as  possible.  The  great  need 
of  the  commercial  world,  at  this  time,  is  a  sound  theory  of  production  and 
exchange,  by  actual  demonstration. 


BOSTON: 
HOUGHTON,  OSGOOD  AND  COMPANY. 

1878. 


Copyright,  1878, 
Br  J.  B.  HOWE. 


RIVERSIDE,  CAMBRIBQE: 
STEREOTYPED  AND  PRINTED  BY 
H.  0.  HOUGHTON  AND  COMPANY. 


TO  THE  BANKERS  OF  THE  UNITED  STATES. 


I  DEDICATE  to  you  this  book,  which  for  good  reasons,  as 
I  believe,  I  have  entitled  "  The  Political  Economy  of  Great 
Britain,  the  United  States,  and  France,  in  the  use  of  Money. 
A  new  Science  of  Production  and  Exchange." 

My  theory  of  money,  and  consequently  of  deposits,  is,  I 
believe,  entirely  new,  and  therefore  so  entirely  opposed  to 
all  current  ideas  and  the  language  which  embodies  them,  that 
to  get  a  fair  hearing  at  once  may  perhaps  be  difficult. 

Commerce  is  a  series  of  exchanges  ;  gold  aod  silver  are 
exchanged  for  all  articles  of  merchandise  in  international 
commerce,  where  there  are  no  convertible  promises  to  deliver 
them  on  demand.  Where  there  are  such  promises  they  may 
be  substituted  in  the  national  markets,  except  where  ship- 
ments of  money  into  the  markets  of  other  nations  are  re- 
quired ;  and,  in  the  latter  case,  the  money  usually  becomes 
merely  bullion.  Gold  and  silver  in  coin,  and  all  other  me- 
taUic  money,  when  actually  exchanged  for  merchandise  of 
any  sort,  naturally,  because  necessarily,  cease  to  be  like  the 
ordinary  merchandise  for  which  they  are  exchanged.  The 
relation  between  one  kind  of  merchandise  and  another,  when 
the  two  are  directly  bartered  for  each  other,  is  plain  and  pal- 
pable, and  consists  of  the  different  uses  to  which  they  are  to 
be  put,  and  the  respective  quantities  of  each  to  be  had,  etc. 
When  two  Africans  or  two  Indians  exchange  commodities, 
they  naturally,  perhaps  instinctively,  value  by  units.  This 
is  demonstrated  by  the  kind  of  money  they  use,  where  they 
use  tangible  money  at  all.  There  was  at  one  time  a  western 
tribe  of  Indians  which  used  elk  teeth.    These  must  have 


iv 


DEDICATION. 


been  substantially  mere  units  of  valuation  and  purchase. 
There  was  an  African  tribe,  says  Montesquieu,  who  used  ab- 
stract units  called  Macoutes  to  make  their  exchanges.  There 
was  really  no  such  thing  as  a  Macoute,  except  as  the  name 
of  an  abstract  unit ;  if  there  had  been  it  was  no  longer  to  be 
found.  These  were  merely  units  of  valuation,  and  not  of 
valuation  and  purchase. 

This  is  the  true  nature  of  all  money.  Neither  gold  nor  sil- 
ver, in  its  character  of  money,  can  by  any  possibility  be  val- 
ued, nor  can  it  be  used  to  value,  as  an  ordinary  commodity. 
The  bullion  can  be  so  valued  and  can  itself  so  value  ;  and 
can  value  and  be  valued  in  no  other  way.  Hence  the  bullion 
rates  in  London  are  mere  barter  rates  of  exchange  between 
gold  and  silver,  or  metallic  merchandise  or  commodities ;  sil- 
ver has  not  fallen  fifteen  per  cent,  below  gold,  but  only  seven 
and  one  half  per  cent.,  while  gold  has  risen  seven  and  one 
half  per  cent,  above  silver.  One  has  lost  and  the  other  has 
gained  in  barter  rates,  precisely  to  the  same  extent.  If  Ger- 
many had  kept  silver  as  standard  instead  of  adopting  gold, 
while  on  the  other  hand  the  states  of  the  Latin  Union  had, 
as  they  virtually  have,  made  gold  the  standard  by  stopping 
the  free  coinage  of  silver,  silver  would  have  fallen  less  and 
gold  would  have  risen  less  than  it  has  in  London.  The  dif- 
ference resulting  from  the  act  of  the  Latin  Union,  whatever  it 
might  be,  would  have  found  expression  in  Berlin  as  a  rise  in 
gold  and  not  a  fall  in  silver  ;  and  it  could  not  be  intelligibly 
stated  in  any  other  terms.  On  the  London  side  we  should, 
in  that  case,  I  will  suppose,  have  a  fall  in  silver  of  say  seven 
and  one  half  per  cent.,  and  on  the  Berlin  side  a  rise  in  gold 
of  seven  and  one  half  per  cent.  But  rise  of  gold  cannot  take 
place  at  Berlin  unless  silver  is  stationary  at  Berlin,  and  fall 
of  silver  cannot  take  place  in  London  unless  gold  is  station- 
ary at  London.  A  contradiction  in  terms  results  which  can 
only  be  solved  by  a  mutual  compromise.  The  solution  is, 
that  gold  has  risen  halfway  and  silver  has  fallen  halfway. 

But  this  has  nothing  to  do  with  the  actual  average  pur- 
chasing power  of  gold  in  England,  and  of  silver  in  Germany 
or  India,  in  the  shape  of  units  of  money.    Average  purchas- 


DEDICATION. 


V 


ing  power  of  gold  and  silver  depends  upon  two  elements  : 
first,  total  number  of  units  coined  and  distributed ;  and 
second,  total  amount  of  circulation  accomplished  by  them. 
The  relation  of  the  metallic  merchandise  or  commodity  gold, 
or  the  metallic  merchandise  or  commodity  silver,  to  all  other 
merchandise  or  commodities,  is  necessarily  and  unavoidably 
abstract ;  that  is  to  say,  the  only  conceivable  relation  be- 
tween them  universally  existing  is  that  of  units  ;  and  this 
conception  is  practically  carried  into  effect,  whenever,  where- 
ever,  and  however  money  is  used. 

This  is  the  reason,  and  the  only  reason,  why  paper  money 
largely  takes  the  place  of  the  metals.  All  money  becomes 
a  substitute  merchandise  or  commodity  in  all  exchanges. 
But,  to  speak  with  rigorous  accuracy,  it  is  only  a  series  of 
units  of  valuation,  purchase,  and  payment,  limited  so  far  as 
limited  at  all,  if  metal,  by  the  quantity  of  metal  to  be  had  ; 
if  convertible  paper,  limited  perfectly  or  imperfectly  by  the 
units  of  metal  circulating  at  the  same  time  ;  and  if  incon- 
vertible, only  by  the  exchanges  it  makes  with  commodities. 

This  analysis  lets  in  a  flood  of  light  upon  banking  reserve 
and  deposits.  If  gold  or  silver  in  the  banking  reserve  is  an 
ordinary  commodity,  as  Adam  Smith  and  everybody  else  in 
his  time  believed  and  asserted,  and  everybody  has  taken  for 
granted  since,  then  merely  to  supply  the  demand  is  all  that 
is  necessary,  and  bankers  keep  much  more  than  is  necessary, 
because  they  keep  much  more  than  enough  to  meet  ordinary 
calls.  But  if  gold  and  silver  money  furnish,  as  unquestion- 
ably they  do,  the  steadiest  currency,  not  because  they  are 
ordinary  commodities,  but  because  there  is  already  a  vast  ac- 
cumulation of  such  money  distributed  with  and  by  commerce, 
and  because  instead  of  being  ordinary  commodities  they  are 
really  units  of  valuation,  purchase,  and  payment,  or  substitute 
commodities,  if  in  order  to  aid  the  understanding  we  choose 
to  call  them  so,  then  an  intelligible  relation  between  deposit- 
reserve  and  deposits  is  immediately  demonstrated. 

If  we  wish  to  regulate  deposits,  we  must  do  it  by  the  re- 
serve ;  if  we  do  not,  deposits  will  regulate  the  volume  of  the 
reserve  instead  of  the  reserve  regulating  the  volume  of  de- 


vi 


DEDICATION. 


posits.  Deposits,  as  distinguished  from  the  reserve,  are  not 
money,  but  a  power  to  put  in  circulation  money  out  of,  into, 
and  in  some  cases  (by  clearing)  in  the  reserve,  equivalent, 
so  far  as  the  circulation  into,  out  of,  and  in  the  reserve  is 
concerned,  to  so  much  money.  They  are  powers  to  put  in 
circulation,  by  means  of  the  stream  coming  into  the  reserve, 
the  same  amount  of  money  the  owners  of  the  powers  could 
circulate  if  they  had  bank-notes  or  metal  equaling  the 
powers  in  volume  ;  while  the  banks  at  the  same  time  have 
an  unlimited  power  to  put  in  circulation,  through  loans,  all 
the  money  the  producing  market  will  stand  short  of  a  crisis ; 
and  these  loans  are  all  supplied,  as  they  are  made,  out  of  the 
same  stream.  This  results  from  the  unit  character  of  all 
money.  The  only  check  possible  or  supposable  in  the  case, 
is  a  limitation  of  the  volume  of  these  powers  (created  by 
bank  loans)  by  the  incoming  stream  of  deposits,  which  is 
supplied  by  actual  exchanges  of  merchandise  for  consump- 
tion. Why  and  how  such  a  limitation  naturally  results  from 
the  use  of  sound,  convertible  bank-notes,  coming  from  banks 
of  issue  only,  having  no  function  of  deposit  or  discount  (for 
all  which  we  have  the  testimony  of  Adam  Smith  in  respect 
to  the  Scotch  banks  of  issue  of  his  time),  and  why  and  how 
it  happens  that  no  such  limitation  exists  in  respect  to  the 
powers  referred  to,  called  deposits,  which  are  equivalent  to 
bank-notes,  I  have  discussed  in  every  form  I  could  think  of, 
and  from  every  angle  of  observation  I  could  find,  in  the 
book  referred  to  above. 

My  theory  thus  answers  the  old  question  :  "Of  what  use 
is  metal  in  banking  reserve  beyond  supplying  the  calls  of 
those  who  want  to  carry  it  away  from  the  bank  ?  "  It  is 
equally  efficient  in  solving  the  problem  in  respect  to  the  re- 
monetization  of  silver  by  the  United  States.  The  objec- 
tions to  remonetization  do  not  arise  from  the  cheapness  of 
silver  or  dearness  of  gold.  Probably  no  material  difference 
would  exist  between  the  purchasing  power  of  silver  in  the 
United  States,  should  our  barter  rate  of  monetization  drive 
out  all  the  gold,  and  the  purchasing  power  of  gold,  should 
we  refuse  to  remonetize.    Other  things  being  equal  and  no 


DEDICATION. 


vii 


treasury  notes  kept  out  in  either  case,  probably  the  differ- 
ence would  not  exceed  three  per  cent.  In  other  words,  we 
might  have  in  one  case  three  per  cent,  more  of  silver  dol- 
lars, their  multiples  and  fractions,  than  in  the  other  case  of 
gold  dollars,  their  multiples  and  fractions.  To  bring  about 
this  final  result  would  take  some  time,  but  before  it  could  be 
accomplished,  the  barter  rates  of  exchange  between  metals  in 
London  would  produce  fluctuating  rates  of  exchange  against 
outgoing  produce  from  the  United  States,  which  could  only 
be  paid  by  an  arbitrary  credit  given  to  the  outgoing  produce 
to  cover  the  difference.  This  would  make  its  appearance  in 
the  bills  of  exchange,  founded  upon  the  outgoing  produce. 
The  debit  to  silver,  in  the  barter  exchange  with  gold  in 
London,  would  be  paid  by  American  outgoing  produce.  In 
order  to  make  this  payment,  it  must  first,  through  bills  of 
exchange,  be  credited  with  that  difference.  To  create  this 
credit  a  credit  must  be  entered  for  bills  of  exchange,  founded 
upon  and  resulting  from  the  outgoing  merchandise.  This 
would  create  a  debt  to  be  paid  by  all  production  and  all  com- 
merce in  the  end,  to  a  great  extent,  although  outgoing  prod- 
uce would  retain,  probably,  a  part  of  the  credit  it  had  re- 
ceived. Furthermore,  merchants  and  bankers  of  the  United 
States  are  not  yet  ready  to  deposit  in  the  treasury  all  their 
silver,  and  circulate  it  by  means  of  paper.  To  circulate  it  in 
any  other  manner,  after  driving  away  all  the  gold,  would  be 
intolerable.  To  substitute  silver  entirely  for  gold,  and  take 
the  load  other  nations  have  thrown  off  in  part,  and  will 
gradually  throw  off  entirely,  would  be  to  go  backward  and 
not  forward ;  it  would  also  cost  more  than  to  keep  our  pres- 
ent stock  of  gold,  get  a  little  more,  and  maintain  an  out- 
standing circulation  of  treasury  notes  to  the  amount  of 
seventy-five  to  one  hundred  and  fifty  millions. 

Whether  we  keep  gold,  or  exchange  it  for  silver,  an  equal 
cancellation  of  bank  and  treasury  notes  is  demanded,  in 
either  case.  Ultimately,  in  case  of  remonetization  at  the 
ratio  of  16  and  1,  the  barter  exchange  between  metals  would 
settle  down  to  a  comparatively  steady  rate ;  perhaps  three 
per  cent.    The  change  would  be  an  experiment,  resulting 


viii 


DEDICATION. 


in  no  expansion,  in  the  popular  sense,  but  in  great  inconven- 
ience, and  a  postponement  of  convertibility.  The  premium 
on  metal  in  treasury  and  bank  notes  is  no  indication  of  the 
contraction  we  must  actually  make  in  the  volume  of  out- 
standing paper.  The  real  contraction  which  has  taken  place 
is  in  production  and  business;  production  is  the  original 
source  of  deposits  over  and  above  reserve  ;  the  whole  volume 
of  money  must  be  reduced.  This  volume  has  at  this  time 
nothing  to  do  with  prices. 

These  are  the  true  and  therefore  the  only  really  practical 
objections  to  the  remonetization  of  silver  at  the  ratio  of  16 
and  1.  The  whole  subject  should  be  postponed  to  a  con- 
gress of  commercial  nations.  If  the  United  States  choose, 
they  have  undoubtedly  the  same  right  to  remonetize  that 
other  nations  had  to  demonetize.  They  are  bound  by  only 
one  guaranty,  and  that  is  to  keep  their  creditors  and  all 
other  creditors  safe  from  any  loss  by  reason  of  their  act, 
when  the  loss  is  the  direct  result  of  it,  and  from  any  loss  by 
the  act  of  other  nations.  Had  the  United  States  driven  out 
gold,  by  undervaluing  its  barter  rate  with  silver,  instead  of 
driving  out  silver  as  they  did,  by  undervaluing  its  barter 
rate  with  gold,  the  late  demonetizations  would  have  caused  a 
rise  of  barter  rate  on  the  part  of  gold,  which  would  have  de- 
preciated their  silver  dollar  regarded  as  bullion  in  European 
markets.  This  loss  the  United  States  would  have  been 
bound  to  make  good  to  their  creditors,  although  the  exact 
tenor  of  the  bond  would  not  have  required  it. 

It  is  not  the  legal  tenor  of  their  obligations  which  binds 
nations  ;  it  is  their  equitable  tenor.  The  barter  rates  of  the 
two  metals,  or  the  barter  rate  of  one  metal  to-day,  as  com- 
pared with  its  barter  rate  at  a  future  day,  as  in  the  case  last 
supposed,  must  determine  the  question ;  it  is  not  the  relative 
purchasing  power  of  the  two  metals  considered  as  one  in  re- 
spect to  all  commodities,  nor  the  relative  purchasing  power 
of  one  metal  (e.  g.  silver)  to-day,  compared  with  its  purchas- 
ing power  at  a  future  day,  that  determines  the  liability. 
That  difference  is  practically  incapable  of  being  ascertained, 
depending  upon  an  indefinite,  I  had  almost  said  infinite, 


DEDICATION. 


ix 


number  of  ratios  resulting  from  each  purchase.  Govern- 
ments may  depreciate  gold  forty  per  cent,  in  purchasing 
power,  as  did  the  United  States,  but  this  they  cannot  be 
called  upon  to  make  good  to  home  creditors.  Purchasing 
power  is  one  thing ;  barter  exchange  rates  between  gold  and 
silver,  or  gold  to-day  as  compared  with  gold  to-morrow,  and 
silver  to-day  as  compared  with  silver  to-morrow,  are  another 
thing. 

Again,  were  there  but  one  metal,  quantity  of  metal  in  a 
money  unit  of  a  given  name  to-day  is  one  thing,  and  quan- 
tity in  the  same  unit  to-morrow  is  another  thing.  To  raise 
this  question  of  barter  exchange  requires  more  than  one 
country,  and  a  market  like  that  of  the  commercial  world, 
composed  of  the  markets  of  several  countries,  and  purchasing 
power  is  not  an  element  of  it.  The  late  commission  ap- 
pointed in  England  to  inquire  into  silver  prices  in  India,  re- 
sulting from  the  late  demonetizations  of  silver,  ought  to 
have  been  supplemented  by  a  commission  to  inquire  into 
gold  prices  in  England.  From  the  standpoint  of  gold  and 
silver  money  being  ordinary  commodities,  and  governed  by 
the  laws  of  ordinary  commodities,  one  commission  would 
have  been  as  reasonable  as  the  other.  It  is  a  mistake  to  sup- 
pose that  bankers  have  any  peculiar  interest  in  opposition  to 
the  reraonetization  of  silver ;  so  far  as  bank-note  redemptions 
go  their  interest  lies  with  remonetization.  It  is  really  the 
whole  country  that  is  interested  against  it,  and  not  a  part  of  it. 

These  are  some  of  the  new  ideas  brought  forward  in  the 
book,  and  to  them  I  invite  the  attention  of  all  bankers.  I 
ask  this  because  it  is  so  difficult  to  get  a  hearing  upon  a  sub- 
ject which  every  one  supposes  that  he  understands  suffi- 
ciently already.  It  is  credit  of  some  kind,  on  a  gigantic  scale, 
which  is  the  cause  of  commercial  crises.  It  comes  in  some 
way  from  bank  loans,  because  a  banking  crisis  accompanies  a 
commercial  crisis.  Either  the  latter  causes  the  former,  or 
the  former  causes  the  latter.  But  it  is  impossible  for  com- 
mercial crises  to  be  the  cause ;  they  are  only  the  result. 
Banks  then  are  the  cause  or  one  of  the  causes,  and  the  cause 
is  brought  to  bear  through  loans,  and  loans  depend  upon  the 
reserve. 


DEDICATION. 


It  is  inconceivable  how  a  mass  of  metal  or  ordinary  com- 
modity in  the  reserve  can  have  any  effect.  It  must  and 
can  be  conceived  as  a  series  of  units  only,  like  the  units  of 
bank  credit.  Without  this  conception,  the  whole  subject  is 
chaos. 

Upon  no  other  conception  of  money  is  it  possible  to  un- 
derstand in  what  way  a  reserve  of  metal  can,  in  any  manner, 
regulate  bank  loans,  or  have  any  necessary  connection  with 
them.  It  is  in  consequence  of  the  credit  character  of  all 
money  that  bank  debt,  whether  in  the  shape  of  notes  or 
credit  entries,  connected  with  outstanding  circulation  by 
means  of  the  reserve,  becomes  a  substitute  for  an  equal  num- 
ber of  the  units  of  metal  in  bank-note-redemption  reserve 
and  in  banking  reserve.  Whoever  offers  metallic  money, 
bank-note  money,  or  credit  in  bank,  to  be  transferred  by 
check,  in  exchange  for  all  things  on  sale,  labor  included,  is 
by  convention  entitled  to  make  the  exchange.  If  by  any. 
artificial  contrivance  the  money  can  be  used  to  pay  for  labor 
faster  than  the  results  of  that  labor  can  command  the  same 
amount  of  money  the  labor  cost,  the  result  (which  is  the 
main  thing  to  be  looked  at)  is  production  on  credit.  The 
credit  consists  in  obtaining  a  living  by  consuming,  through 
the  aid  of  the  money  advanced,  things  other  than  those  pro- 
duced, and  retaining  the  savings  of  labor  in  the  shape  of 
earnings  to  be  used,  as  the  other  portion  of  the  money  was, 
in  future  support  and  in  paying  over  future  wages  out  of 
profits  obtained  from  sales  of  the  overstock  by  producers  to 
those  who  cannot  sell  it  to  consumers  ;  in  profits  out  of  such 
sales  realized  by  stockholders,  in  vast  sums  in  the  shape  of 
discount  and  interest  paid  to  banks  and  individuals  out  of 
the  same  fund,  and  in  wages  indirectly  paid  out  by  the  re- 
ceivers of  these  dividends  and  profits,  through  the  purchase 
of  railroad  debentures,  mortgages,  city,  town,  and  county 
bonds ;  the  proceeds  being  applied  to  pay  for  labor  or  debts 
due  labor. 

It  is  said  that  deposits  arise  from  sales.  This  is  a  mis- 
take. They  arise  from  production;  and  under  the  English 
and  American  system  of  banking  they  arise  from  production 


DEDICATION. 


xi 


on  credit.  The  means  of  creating  the  credit  consist  of  the 
loans  of  money  which  are  used  to  pay  for  labor  faster  than 
labor's  results  will  sell,  or  can  themselves  become  productive. 
It  is  a  blocking  of  the  exchanges.  This  is  the  real  credit. 
Banks  do  not  make  all  the  loans ;  they  make  the  loans  by 
which  other  loans  become  possible,  and  then  all  the  loans 
taken  together  constitute  the  vast  system  upon  which  pro- 
duction on  credit  is  built  up. 

The  ability  to  produce  is  limited,  and  hence  the  power  of 
consuming,  if  not  limited  otherwise,  is  limited  by  the  power 
of  producing.  Consumption  is  thus  brought  to  an  average, 
and  being  itself  thus  brought  to  an  average,  brings  the  cir- 
culation of  money,  as  the  means  of  distributing  the  things 
to  be  consumed,  to  an  average. 

One  class  of  consumers  cannot  go  far  in  advance  of  another, 
therefore ;  and  so  far  as  they  do  go  in  advance  the  circulation 
of  money  must  go  equally  in  advance,  and  general  prices 
must  rise.  Production  rises  in  proportion  until  checked  by 
the  law  just  stated.  Money  in  the  reserve  is  deposited  from 
the  outstanding  circulation,  which  is  all  the  time  making  dis- 
tribution to  consumers.  On  the  other  hand,  the  increasing 
volume  of  deposits  shows  the  increase  in  the  volume  of  prod- 
ucts which  cannot  be  distributed  for  consumption.  There- 
fore, to  allow  deposits  to  increase  in  this  manner  is  to  at- 
tempt to  regulate  consumption  by  production,  the  commerce 
of  commodities  by  production  of  commodities.  To  regulate 
deposits  by  reserve  is,  on  the  other  hand,  to  limit,  at  some 
point,  the  production  of  commodities  by  the  commerce  of 
commodities ;  and  hence  if  metal  constitutes  the  reserve,  it 
must  itself  constitute  a  part  of  outstanding  circulation,  either 
alone  or  in  company  with  bank-notes,  as  was  the  case  in 
Adam  Smith's  time  in  Scotland.  This  is  the  only  kind  of 
real  connection  between  deposits  and  banking  reserve,  be- 
cause reserve,  on  the  one  hand,  shows  the  consumption  and 
therefore  the  real  commerce  of  the  country  which  supplies 
it,  and,  on  the  other  hand,  deposits  show  a  large  proportion 
of  the  production  of  the  country  which  supplies  the  com- 
merce ;  the  ratio  between  deposits  and  reserve  shows  the 


xii 


DEDICATION. 


ratio  or  proportion  between  accumulated  stocks  and  actual 
commerce.  If  the  latter  ratio  is  maintained  at  an  average 
within  short  intervals,  business  is  sound  and  healthy,  as  in 
France,  with  her  metallic  currency  without  banks  ;  if  at  long 
intervals  only,  as  in  England,  under  her  virtually  metallic 
currency,  and  in  the  United  States,  with  their  convertible 
bank-note  currency,  business  is  not  sound  and  healthy,  be- 
cause the  average  can  be  brought  about  only  by  a  commer- 
cial crisis,  which,  in  true  economical  science,  is  a  rectification 
of  the  exchanges,  by  forces  paramount  to  money  and  the  use 
of  money. 

My  theory  of  money  thus  explains  all  the  phenomena  of 
money,  in  addition  to  the  fact  that  I  have  demonstrated  it 
both  directly  and  indirectly,  synthetically  and  analytically, 
in  advance  of  this  explanation.  It  shows  also  in  advance 
what  the  commission  of  inquiry  into  East  India  "  silver  '* 
prices  discovered  to  be  the  fact,  that  prices  have  not  risen  in 
India  in  consequence  of  the  fall  of  silver  bullion  in  Europe, 
and  that  any  change  of  this  kind  must  be  slow ;  while,  on 
the  other  hand,  any  change  in  gold  "  prices  must  be  equally 
slow;  and  the  changes  themselves,  when  accomplished,  will 
be  of  little  practical  importance  unless  further  monetizations 
or  demonetizations  on  an  extensive  scale  occur.  All  this  is 
true  because  gold  and  silver  coin  have  no  universal  relation 
to  all  other  commodities  except  that  of  numbers  by  units, 
and  no  mental  conception  of  any  other  universal  relation  can 
be  formed.  Bullion  rates  are  therefore  a  part  of  necessary 
means  to  the  end,  which  is  coining  of  units  of  weight  to  be 
used  as  money.  Changes  in  the  latter  are  the  slow  and 
gradual  results  of  changes  in  the  former.  No  extensive 
changes  in  purchasing  power  are  likely  to  result. 

Relative  consumption  of  gold  and  silver  in  the  arts  and 
manufactures  is  increased  by  relative  increased  production, 
and  diminished  by  relative  decreased  production.  The  vast 
store  of  silver  and  gold  in  the  latter  shape  and  the  vast  store 
(probably  twice  as  much)  in  coin,  render  it  practically  im- 
possible that  there  should  be  any  overproduction  of  either 
metal,  because  the  ratio  of  production  to  money  is  so  small ; 


DEDICATION. 


x'lii 


but,  nevertheless,  under  deposit  loans,  conservative  bankers, 
manufacturers,  and  merchants  are  powerless  in  checking  the 
advancing  tide  of  ill-balanced  production.  How  to  do  it  I 
have  shown  in  this  work. 

The  question,  "  What  is  money  ? "  has,  in  my  opinion, 
never  been  answered  truly  before,  because  the  answer  has 
always  been  and  still  is.  Real  money  in  the  shape  of  metal  is 
a  commodity,  like  all  other  commodities.  I  claim  to  have 
demonstrated  in  this  work  that  it  is  not  an  ordinary  com- 
modity, but  a  conventional  one  ;  in  exact  language,  a  unit  of 
valuation,  purchase,  and  payment,  and,  taken  altogether,  a 
series  of  such  units  limited  in  number  by  the  metal  which 
localizes  them. 

Having  thus  answered  the  question,  "  What  is  money  ?  " 
I  am  prepared  to  answer  the  questions,  "What  are  De- 
posits ?  "  and  "  How  do  they  affect  production  and  com- 
merce ?  "  As  articles  of  commerce  are  produced  and  sold  in 
excess  of  consumption,  deposits  increase  ;  as  they  are  'sold  to 
consumers  who  get  their  money  from  articles  of  commerce 
they  have  sold  themselves,  the  reserve  increases.  The  circu- 
lation of  money  is  everywhere  and  always  one  and  the  same 
thing,  because  money  is  everywhere  one  and  the  same  thing 
in  substance  ;  and  production,  commerce,  and  circulation  con- 
stitute one  grand  whole,  whose  minutes  are  recorded  in  Eng- 
land and  the  United  States  in  deposit  and  discount  banks. 
It  is  impossible  to  understand  this  fully  without  a  preceding 
analysis  (mentally)  of  money  and  its  uses.  It  is  because  all 
money  is  essentially  a  series  of  units,  each  of  which  is  pos- 
sessed of  purchasing  power,  in  proportion  to  the  number  of 
all  of  them,  multiples  and  fractions  included  ;  whether  units 
be  in  the  shape  of  reserve  or  in  deposits  generally  or  in  bank- 
notes, or  in  any  kind  of  commodity  (even  wheat  by  measure 
or  weight  units),  that  the  reserve  is  in  any  sense  a  regulator 
of  discounts.  Whatever  may  be  the  money  in  circulation, 
the  reserve,  in  the  absence  of  artificial  regulation,  is  made  up 
and  consists  entirely  of  money  deposited  out  of  that  circula- 
tion ;  and  that  circulation  is  the  circulation  of  a  consumer's 
market.    If,  on  short  averages,  seventy-five  per  cent,  only  of 


xiv 


DEDICATION. 


all  deposits  were  kept  out  on  loan,  there  could  be  no  such 
thing  as  we  call  a  banking  crisis,  because  the  consumption 
and  therefore  the  exchanges  of  merchandise  with  and  among 
actual  consumers,  would,  upon  short  averages  from  that  point, 
equal  the  production  of  merchandise  and  of  all  commodities 
and  services. 

There  are  three  grand  fallacies  which  must  be  subverted 
before  there  can  be  any  progress  in  monetary  science:  a 
bank  does  not  deal  in  debt  or  credit,  as  commonly  supposed  : 
money  (gold  or  silver)  is  not  a  commodity  :  the  doctrine 
that  there  can  be  no  overproduction  is  absolutely  false  though 
relatively  true.  In  opposition  to  these  fallacies,  I  claim  to 
have  demonstrated  the  following  propositions :  A  bank 
deals  only  in  that  additional  use  of  money  deposited,  over 
and  above  the  use  made  by  depositors,  which  the  current  of 
deposits  enables  it  to  make,  and  the  result  appears  in  loans 
on  the  side  of  the  bank  and  production  on  the  side  of  the 
borrower.  This  additional  use  may  be  called  the  credit  cir- 
culation of  money.  A  bank  of  deposit  can  no  more  deal  in 
its  own  debt  than  a  house  can  stand  in  the  air  without  foun- 
dation. The  moment  it  deals  in  its  own  debt  it  must  be- 
come a  bank  of  issue  in  some  form.  Deposits  come  only 
from  outstanding  circulation.  Hence  to  fix  and  keep  reserve 
at  a  certain  point  is  merely  to  stop  using  the  money  of  com- 
merce at  a  fixed  point,  instead  of  using  it  in  further  produc- 
tion. This  is  demonstrated  by  the  fact  that  when  reserve 
ends  banking  ends.  Money  is  not  a  commodity  but  a  series 
of  valuing,  purchasing,  and  paying  units ;  otherwise  it  could 
never  furnish  steady  circulation  and  prices.  M.  J.  B.  Say's 
law,  that  there  can  be  no  overproduction,  while  relatively 
true  in  a  limited  sense  is  absolutely  false,  because  the  abso- 
lute necessaries  of  life  cannot  be  overproduced,  while  the 
relative  can  be  and  are  being  overproduced  in  a  ratio  pro- 
gressively increasing  with  the  progress  of  civilization.  In 
France  rectification  of  the  latter  takes  place  within  short,  in 
England  long,  and  in  the  United  States  still  longer  periods. 
The  present  generation  of  writers  and  bankers  will  not  ac- 
cept and  act  upon  these  new  ideas  or  theories ;  the  next  will. 


DEDICATION. 


XV 


If  banks  deal  in  credit,  it  must  be  an  ordinary  credit  like 
that  of  merchants  given  to  merchants  ;  but  this  is  impossible, 
because  one  of  the  effects  of  bank  loans  is  to  raise  general 
prices.  Mercantile  credit  only  raises  the  price  of  the  mer- 
chandise sold  on  credit.  Again,  bank  loans  feed  laborers, 
producers,  and  their  families,  whether  the  loans  are  made 
directly  to  first  producers  who  originate,  or  to  intermediate 
producers  who  produce  additional  value  in  the  merchandise 
on  its  way  to  market.  The  latter  step  into  the  first  pro- 
ducer's place  in  bank  through  a  loan  which  succeeds  and 
also  adds  to  the  amount  of  the  first.  Neither  mercantile 
credit,  nor  any  credit  which  resembles  it,  can  accomplish 
those  results  which  bank  loans  undoubtedly  accomplish,  and 
which  every  practical  man  must  admit  they  do  accomplish. 
The  premises,  being  thus  contradicted  by  the  conclusion  in 
two  very  important  particulars,  must  be  false. 

The  fallacy  that  banks  deal  in  their  own  debt  probably 
arose  from  the  fallacy  that  bills  of  exchange,  notes,*  and 
checks  are  a  "  species  of  currency."  If  the  notes  given  for 
merchandise,  and  the  bills  drawn  against  it,  circulated  gen- 
erally, Uke  bank-notes,  then  undoubtedly  they  would  be 
money  as  well  as  bank-notes,  and  would  affect  prices  in  the 
same  manner.  They  would  also  be  equally  eflBcient  in  buy- 
ing the  merchandise  necessary  to  support  the  laborers,  pro- 
ducers, and  merchants,  who  are  creating  overstock  and  hold- 
ing it  by  the  aid  of  bank  loans.  But  this  is  not  the  case. 
Checks  would  also  be  money  as  well  as  bank-notes,  if  they 
circulated  in  the  same  manner,  but  they  do  not.  They  are 
the  instruments  to  put  in  circulation  the  money,  which  is 
called  the  reserve.  This  word  of  itself  indicates  what  de- 
posits are.  All  the  circulation  brought  about  by  depositors, 
whether  they  become  such  by  loan  or  not,  is  through  the 
reserve.  What  has  helped  to  perpetuate  the  fallacy  that  a 
bank  deals  in  its  own  debt  is  the  old  theory  that  money  has 
a  mercantile  value.  Because  this  is  an  error,  and  money  is 
really  a  series  of  units,  there  is  no  assignable  limitation  but 
a  commercial  crisis  to  the  amount  of  circulation,  which  may 
be  accomplished  by  means  of  the  reserve. 


xvi 


DEDICATION. 


It  is  the  rise  of  prices  and  feeding  and  supporting  pro- 
ducers and  laborers  of  all  kinds  which  causes  that  want  of 
harmony  in  production  which  can  only  be  rectified  by  a  com- 
mercial, industrial,  and  banking  crisis.  All  loans  of  money, 
even  in  France,  cause  production  on  credit,  but  rectification 
of  the  exchanges  of  merchandise  and  money  takes  place  at 
short  intervals.  If  we  represent  the  production  of  absolute 
necessaries  by  a  circle,  and  that  of  relative  necessaries  by  an 
inscribed  polygon,  then  to  designate  the  production  and  com- 
merce of  France,  we  may  inscribe  a  polygon  of  three  hundred 
and  sixty  sides,  for  that  of  England,  one  of  thirty- six,  and  for 
that  of  the  United  States,  one  of  eighteen  sides.  In  France, 
the  inscribed  polygon,  for  all  practical  purposes,  is  the  circle 
itself,  because  it  touches  it  so  frequently. 

Relative  deviation  from  harmony  of  production  in  the 
three  countries  is  thus  illustrated.  The  absolute  and  the 
relative  are  practically  on  a  par  in  France,  but  are  brought 
together  in  England  and  the  United  States  only  by  a  crisis. 
It  requires  a  severe  crisis  to  make  the  inscribed  polygon 
touch  the  circle  in  England,  and  a  still  more  severe  one  in 
the  United  States.  The  forces  at  work  to  bring  on  a  crisis 
both  in  England  and  the  United  States  are  in  the  end  par- 
amount to  money  and  the  circulation  of  money. 

That  the  operation  of  these  forces  is  postponed  to  so  late 
a  period  in  England  and  the  United  States  that  the  banking 
and  commercial  crisis  is  the  only  remedy,  while  in  France 
they  operate  so  speedily  and  continuously  that  no  crisis 
arising  from  causes  working  at  home  makes  its  appearance, 
results  from  the  fact  that  money  is  what  I  have  aJB&rmed  it 
to  be,  and  not  a  mercantile  commodity,  and  because  a  bank 
deals,  not  in  ordinary  mercantile  credit,  or  a  credit  resem- 
bling it,  but  in  a  circulation  of  depositors'  money  which  is 
represented  exactly  by  bank  loans,  and  which  is  in  excess  of 
all  the  circulation  caused  by  depositors  themselves.  If  de- 
posit banking  (without  power  to  discount)  could  be  and 
were  introduced  at  once  throughout  France,  depositors  put- 
ting their  money  in  circulation  by  the  use  of  checks,  twenty- 
five  per  cent,  of  the  money  deposited  would  be  sufiicient  to 


DEDICATION. 


xvii 


meet  all  calls,  and  the  remainder  might  be  locked  up.  The 
incoming  stream  of  deposits  would  supply  the  outgoing 
stream  represented  by  checks.  The  money  locked  up  could 
not  be  used  by  the  banks  without  adding  seventy-five  per 
cent,  to  the  existing  volume  of  loans.  Suppose  the  banks  to 
use  it,  however  ;  it  would  create  a  crisis  ;  but  if  the  banks 
carefully  refrained  afterwards  from  loaning  any  of  the  twen- 
ty-five per  cent,  now  containing  the  "  reserve,"  there  would 
not  be  another  crisis,  because  henceforth  bank  loans  would 
be  stopped  at  a  definite  point,  the  banks  loaning  seventy- 
five  per  cent,  of  all  their  deposits  and  no  more.  This  is 
what  I  propose  for  American  and  English  banks  in  the  work 
referred  to. 

To  illustrate  the  operation  of  the  English  and  American 
system  as  it  differs  from  the  foregoing :  Suppose  the  French 
banks  to  depart  from  their  wise  resolution,  not  to  use  more 
than  seventy-five  per  cent,  of  the  deposits  in  loans,  and  to 
make  loans  without  any  limitation  by  the  reserve,  they  would 
then  introduce  the  English  and  American  system  of  banking, 
and  with  the  same  results.  As  Mr.  Bonamy  Price  says  in 
relation  to  reserve  in  the  Bank  of  England,  which  includes 
a  large  amount  of  the  reserves  of  all  the  banks,  there  would 
still  be  an  abundance  of  metal  in  the  reserve  to  answer,  and 
more  than  answer,  all  calls.  This  comes  from  metallic 
money  not  being  a  commodity,  but  a  series  of  units,  like 
bank-notes.  All  this  time  the  French  banks  would  deal  only 
in  money  in  the  reserve,  precisely  as  they  did  at  the  begin- 
ning when  they  were  merely  deposit  banks,  and  precisely  as 
they  did  when  they  limited  discounts  by  their  reserve.  The 
American  banks,  if  permitted,  could,  under  "  specie  pay- 
ments," pay  off  their  debts  in  a  year  by  turning  out  the 
whole  reserve  and  the  whole  line  of  discounts  to  depositors, 
or  by  issuing  bank-notes  for  all  deposits  to  depositors,  re- 
taining the  metallic  reserve  to  redeem  with.  In  either  case 
bank  loans  would  soon  come  to  an  end,  because  the  banks 
would  cease  to  exist,  and  there  would  be  no  deposits  to  loan 
from  and  no  stream  of  deposits  to  maintain  loans.  Every 
bank  loan,  therefore,  would  come  to  an  end  in  time,  and  pro- 
b 


xviii 


DEDICATION. 


duction  on  credit  (not  production  as  a  total  or  on  the  aver- 
age) would  be  brought  approximately  to  the  French  stand- 
ard, and  the  circulation  would  be  both  paper  and  metal  as 
with  the  Scotch  •  banks  in  Adam  Smith's  time,  and  now  in 
France. 

Were  the  American  banks  thus  converted  into  banks  of 
issue  exclusively,  it  would  at  once  appear  that  bank  debt 
over  and  above  reserve,  which  I  have  called  a  series  of 
powers  belonging  to  depositors  to  put  money  in  circulation, 
out  of  and  in  the  reserve,  is,  upon  a  close  examination,  noth- 
ing of  the  kind.  It  was  only  a  figurative  expression  to  aid 
the  understanding  in  comprehending  the  assertion  that  the 
whole  circulation  is  supplied  by  the  reserve.  By  the  sup- 
posed metamorphosis  or  change  of  banks  of  discount  into 
banks  of  issue  exclusively,  it  would  now  appear  that  when 
depositors  keep  their  own  money,  a  volume,  equaling  the 
total  of  deposits,  is  requisite  to  supply  the  circulation  they 
cause  to  take  place,  but  when  it  is  all  banked,  twelve,  fifteen, 
or  twenty  per  cent,  is  sufficient,  the  banks  loaning  all  the 
rest.  It  would  appear  that  all  new  loans  are  still,  as  all 
loans  at  the  commencement  of  banking  were,  suppUed  out  of 
what  is  called  the  reserve,  because  there  is  no  other  fund  to 
supply  them.  Deposits,  minus  loans,  always  equal  the  re- 
serve, and  deposit  and  discount  banks  do  not  loan  their 
credit  any  more  than  they  loan  their  confidence  or  their  good 
faith.  Deposit  loans  come  from  what  is  deposited,  not  from 
what  is  not  deposited.  Not  only  bank-notes,  but  mercantile 
notes,  and  even  credit  entered  on  bank  books,  without  any 
reserve  of  metal  whatever,  mighty  nevertheless,  be  used  if  the 
commercial  community  would  agree  to  do  so,  and  could  thus 
make  their  exchanges  satisfactorily,  as  they  surely  could  not. 

The  point  to  be  noted  and  remembered  is,  that  banks  can 
only  deal  in  the  money  of  commerce  which  comes  out  of  a 
consumer's  market.  It  must  be  deposited  before  it  can  be 
loaned,  whatever  its  character  may  be.  The  moment  a  bank 
puts  in  circulation  anything  upon  its  own  credit,  it  becomes 
so  far  a  bank  of  issue.  It  might  enter  credits  to  be  circu- 
lated by  check.    This  would  make  it  so  far  a  bank  of  issue. 


DEDICATION. 


xix 


After  the  credit  was  deposited,  it  might  loan  upon  it  as  a 
bank  of  deposit  and  discount,  and  not  before. 

All  this  results  from  the  fact  that  all  money,  including 
metallic,  is  a  series  of  units,  of  valuing,  purchasing,  and  pay- 
ing power,  and  not  in  any  case  an  ordinary  commodity. 
Were  it  such,  all  exchanges  would  be  made  only  by  the 
primitive  barter  of  barbarians.  The  true  science  of  money, 
of  banking,  and  of  bank  reserve,  will  not  be  understood  until 
this  important  fact  is  believed  and  generally  taught.  When 
it  is,  paper  may  with  great  convenience  be  more  extensively 
used  for  commercial  purposes,  if  properly  limited  by  metal ; 
the  latter  being  confined  chiefly  to  international  exchanges. 

For  the  reasons  given,  to  call  my  theories  by  any  other 
name  than  I  have  given  them  would  be  a  misnomer.  They 
certainly  constitute  an  entirely  new  theory  of  production 
and  exchange.  I  have  demonstrated  by  the  chapter  on  the 
development  of  money  and  its  uses,  and  that  in  which  ,the 
monetary  systems  of  France,  Great  Britain,  and  the  United 
States  are  compared,  that  the  original  idea  of  money  has 
been  developed  in  two  directions :  1st,  that  of  conventional 
commodity  in  the  character  of  units  of  metal  or  other  ma- 
terial ;  and  2d,  that  of  mere  units  localized  in  paper  prom- 
ises ;  and  that  both,  as  units  merely,  have  value  inversely 
in  proportion  to  numbers.  I  have  demonstrated  that  the 
mind  can  form  no  other  conception  of  money  than  that  of 
a  series  of  units.  If  all  commodities  and  merchandise  were 
merely  circulated  as  money  is,  and  never  used  otherwise,  no 
other  conception  would  be  formed  of  them,  because  that 
would  be  the  only  one  called  for. 

It  follows,  in  the  second  place,  without  reference  to  devel- 
opment, and  a  priori^  that  such  must  necessarily  be  the  case 
with  money. 

In  the  third  place,  I  demonstrate  the  same  proposition  by 
collateral  facts.  If  metallic  money  is  a  series  of  units,  lim- 
ited in  quantity  by  the  metal  which  contains  and  numbers 
them,  then  the  two  metals,  gold  and  silver,  ought  to  be  in 
barter  value,  one  to  the  other,  inversely  as  the  weights  of 
the  respective  masses  coined,  assuming  both  to  be  univer- 


XX 


DEDICATION. 


sally  in  use  as  money,  or  approximately  so ;  and  such  has 
always  been  the  case.  Again,  if  metallic  money  is  an  ordi- 
nary commodity,  bartered  for  what  it  buys,  like  other  com- 
modities, then  paper  money  must  be  the  same,  whether 
convertible  or  inconvertible ;  and  barter  rates  of  bullion  in 
London  ought  to  give  the  relative  purchasing  power  of  paper 
as  well  as  gold  and  silver.  But  this  is  not  the  fact,  and 
ought  not  to  be  the  fact,  if  my  theory  of  money  is  true. 
Carrying  out  this  unit  theory  to  its  logical  conclusions,  I 
demonstrate  that  banking  reserve  is  sufficient  to  supply  all 
calls  from  depositors  and  borrowers,  by  means  of  the  in- 
coming stream  of  deposits  supplied  by  the  circulation  of  a 
consumer's  market. 

Passing  on,  I  demonstrate  the  important  distinction  be- 
tween money  and  the  circulation  of  money  and  the  true 
grounds  of  the  fact  generally  accredited  in  the  commercial 
world,  that  gold  and  silver  furnish  the  steadiest  prices,  by 
showing  why  this  is  the  case  in  France,  and  why  it  is  not 
the  case  in  England.  Possibly  I  might  never  have  made 
the  discovery  referred  to  had  I  not  commenced  my  studies 
with  the  complex  questions.  What  are  deposits,  and  what  is 
banking  reserve  ?  The  practical  outcome  of  the  theory  for 
England  and  the  United  States  is,  that  even  with  a  circu- 
lation substantially  metallic  in  the  former,  the  benefit  of  the 
regulating  qualities  of  the  reserve  is  lost,  because  the  circu- 
lation of  the  gold  in  it  varies  with  the  total  of  deposits,  and 
in  the  United  States  bank-notes  and  metal  in  the  reserve 
vary  in  like  manner. 

The  examination  of  deposits  and  reserve  has  also  led  me  to 
discover  that  the  theory  that  there  can  be  no  overproduction 
is  practically  false,  and  that  the  disastrous  results  brought 
on,  in  the  shape  of  industrial,  commercial,  and  banking  crises, 
are  largely  to  be  attributed  to  what  I  call  the  credit  circula- 
tion of  money  in  banking  reserve,  giving  rise  to  production 
on  credit,  as  explained  in  one  of  the  chapters  of  the  book. 

The  mind  almost  instinctively  repels  at  first  thought  the 
idea  that  metallic  money  is  a  series  of  valuing,  purchasing, 
and  paying  units  embodied  in  metal.    It  may  be  aided  by 


DEDICATION. 


examining  the  process  of  all  the  purchases  that  are  continu- 
ally going  on.  Units  of  money  are  proportioned  variously 
to  units  of  goods,  and  units  of  the  latter  to  units  of  money. 
The  resulting  ratios  give  purchasing  power  on  the  one  hand, 
and  price  on  the  other,  and  the  various  ratios  compounded 
give  compound  ratios  of  purchasing  power  and  price. 

But  without  a  few  words  of  qualification  my  definition  of 
money  would  be  entirely  misunderstood.  The  idea,  assump- 
tion, or  belief,  that  either  gold  or  silver  coin  is  an  ordinary 
commodity,  having  mercantile  value,  and  being  therefore  an 
end  in  itself,  instead  of  only  means  to  an  end,  is  the  old  mer- 
cantile theory  itself,  pure  and  simple. 

I  would  not  be  understood  as  affirming  that  this  theory, 
or  rather  this  idea,  can  ever  be  eradicated,  or  that  it  would 
be  desirable  even  if  it  were  possible  to  eradicate  it.  The 
distribution  of  the  precious  metals  has  not  been  entirely  in 
the  tracks  of  commerce,  because  some  nations  receive,  and 
keep  them  in  excess  of  their  commerce,  as  compared  with 
that  of  other  nations ;  and  banks  have  in  some  countries  re- 
duced the  natural  portion  which,  in  the  absence  of  banks, 
they  would  have  required,  the  surplus  going  to  countries 
where  there  are  no  banks.  The  idea  of  mercantile  value  in 
money  is  salutary  where  gold  and  silver,  or  one  of  them 
only,  constitute  the  circulation.  Stability  does  not  lie  in  the 
money  itself  altogether,  but  partly  in  the  persistence  of  the 
mercantile  idea.  Where  money,  however,  has  attained  such 
complex  development  as  in  Great  Britain  and  the  United 
States,  it  has  become  one  of  the  needs  of  the  time  to  subject 
the  phenomena  which  underlie  the  idea  to  rigorous  analy- 
sis, not  for  the  hopeless  purpose  of  supplanting  the  idea  as 
matter  of  fact,  but  for  the  purpose  of  scientific  demonstra- 
tion, with  a  view  to  the  remedy  of  evils  which,  with  the 
advancement  of  society  and  the  progress  of  improvement, 
especially  in  countries  possessed  of  such  productive  energy 
as  Great  Britain  and  the  United  States,  are  assuming  fright- 
ful proportions. 

To  remedy  this  evil  it  is  essential  to  give  a  scientific  (that 
is  to  say,  a  true)  answer  to  the  question,  What  is  money  ? 


xxii 


DEDICATION. 


A  true  solution  of  this  question  will  enable  us  to  reply  to 
the  inquiry,  Is  it  really  ordinary  credit  that  banks  deal  in, 
or  is  it  a  credit  circulation  of  money,  —  a  circulation  in  ex- 
cess of  that  given  it  by  its  owners  who  deposited  it  ?  That 
there  is  a  gigantic  system  of  "  credit "  of  some  kind  which 
underlies  banking  crises  is  past  all  doubt.  The  difficulty  is, 
that  the  whole  subject  is  exceedingly  complex,  and  requires 
searching  investigation. 

Notwithstanding  the  ineradicable  mercantile  idea,  the 
value  of  money  is  entirely  conventional,  because  it  lies 
wholly  in  what  it  buys.  '  It  could  not  be  money  if  its  value 
were  not  conventional.  Gold,  if  demonetized,  would  per- 
haps lose  seventy-five  per  cent,  of  its  present  value.  But 
even  while  it  is  money,  this  twenty-five  per  cent,  of  intrinsic 
value,  which  is  founded  on  intrinsic  utility,  is  a  value  which, 
in  point  of  science,  must  be  eliminated  ;  for  if  it  were  not, 
a  dollar  in  gold  would  be  worth  one  dollar  and  twenty-five 
cents.  This  intrinsic  value  is  means  to  an  end,  and  not  an 
end  in  itself.  It  is  means  to  an  end  because  it  helps  to 
maintain  an  even  ratio  of  metal  going  into  the  state  of  coin. 

But  a  word  as  to  bank  credit.  If  all  the  gold  and  silver 
in  France  were  banked,  and  seventy-five  per  cent,  of  it 
loaned  out,  the  remaining  twenty-five  per  cent,  would  per- 
form as  much  circulation  as  the  one  hundred  per  cent,  did 
before,  because  the  stream  of  payments  on  checks  would  be 
payments  to  sellers,  and  the  stream  of  deposits  a  return  of 
the  same  money  back  again  by  sellers.  Clearings  would  re- 
tain a  considerable  portion  of  the  stream  in  the  bank.  But 
could  it  be  said  with  truth,  that  the  banks  were  dealing  in 
their  own  debt  ?  Certainly  not,  because  if  the  expression 
could  have  any  meaning  whatever  it  would  be  contrary  to 
the  fact.  Nevertheless,  there  is  some  meaning  behind  the 
expression,  if  not  in  it,  and  it  is  this :  that  the  circulation 
given  to  the  money  of  depositors  by  the  banks  would  be  in 
excess  of  all  that  which  could  have  been  given  it  if  there 
had  been  no  banks.  That  circulation,  if  not  stopped  at  a 
fixed  point,  would  build  up  and  maintain  a  system  of  loans 
like  that  of  the  English  and  American  banks  ;  it  would  be 


DEDICATION. 


xxiii 


applied  to  the  purposes  of  production,  and  would  lead  there, 
as  it  has  done  in  the  United  States  and  Great  Britain,  to 
interest  and  dividends  out  of  and  profits  on  merchandise  pro- 
duced and  sold,  out  of  as  well  as  in  a  consumer's  market. 

This  is  not  credit,  but  the  circulation  of  money  on  credit. 
In  the  end,  in  all  such  cases,  production  in  the  quarter  where 
loans  go  stands  debited  with  merchandise  consumed  in  ex- 
cess of  its  merchandise  sold  ;  and  to  pay  the  debt,  overstock 
in  the  shape  of  iron,  cloth,  railroads,  houses,  warehouses, 
municipal  improvements,  lands,  etc.,  bought  at  high  prices 
and  destined  to  be  sold  or  paid  for  at  low  prices,  stands 
pledged  first,  the  remaining  capital  of  the  borrowers  next, 
then  the  profits  and  capital  of  banks  as  guarantors,  and 
lastly  that  of  depositors  through  the  guaranty  of  the  banks. 
This  is  the  kind  of  credit  which  rigorous  analysis  shows  to 
be  the  result  of  bank  loans  not  duly  limited  by  metallic  re- 
serve. The  defect  in  economical  and  monetary  science  ,(for 
it  is  all  one  and  inseparable)  lies  in  not  having  ascended 
above  results  to  their  causes.  My  theory  of  money  is  fur- 
nished by  absolute  demonstration  as  well  as  by  analysis. 

Applying  the  theory  to  the  present  monetary  situation  in 
the  United  States,  the  prospect  of  a  return  to  specie  pay- 
ments within  the  year  1878  and  the  first  day  of  the  year 
1879  are  not  encouraging.  It  is  impossible  to  sustain  a  vol- 
ume of  six  hundred  millions  of  paper  under  convertibility. 
Must  not  at  least  one  third  of  it  be  retired  ?  If  it  is  not 
retired  gradually  in  the  way  proposed  by  Secretary  McCul- 
loch,  must  it  not  be  retired  into  gold  eagles  and  double 
eagles  to  the  amount  of  all  the  gold  the  treasury  will  have  ? 
Will  the  mercantile  idea,  represented  in  hoarding,  be  satis- 
fied with  any  sum  short  of  one  hundred  and  fifty  millions, 
so  long  as  such  a  volume  of  paper  remains  not  retired  ?  The 
premium  on  gold  has  nothing  to  do  with  the  question  ;  the 
contraction  of  circulation  has  nothing  to  do  with  it.  Not- 
withstanding this  contraction,  the  same  volume  of  paper 
remains.  Whoever  wishes  to  study  contraction  of  volume- 
in  a  currency  which  has  been  convertible,  by  the  light  of 
one  which  has  not  been  convertible,  will  do  well  to  look  at 


xxiv 


DEDICATION. 


deposits  and  circulation  as  they  were  in  1857  and  1858,  and 
as  they  were  in  1873  and  1874,  and  since.  Expansion  of 
circulation  is  paying  out  money,  and  contraction  of  circula- 
tion is  receiving  it  back.  We  have  had  enough  of  the  latter, 
but  none  of  that  contraction  of  volume  which  must  antedate 
convertibility. 

Again,  will  any  practical  man  hazard  his  reputation  by 
asserting  that  there  will  be,  under  any  system  of  convert- 
ibility, less  than  fifty  cents  of  metal  to  every  dollar  of  bank- 
note circulation  and  commercial  deposits,  which  latter  are 
equivalent  to  a  like  sum  in  bank-notes  in  the  hands  of  de- 
positors, and  the  reserve  in  the  possession  of  the  banks,  — 
the  two  latter  being  mutually  equivalents,  while  the  banks 
can  at  the  same  time  maintain  the  whole  volume  of  loans  ? 
That  was  the  proportion  of  metal  in  Scotland  in  Adam 
Smith's  time,  and  even  in  the  United  States  in  1857,  the 
difference  being  that  in  Scotland  the  metal  circulated  with 
the  bank-notes,  while  in  the  United  States  one  hundred 
millions  of  it  were  hoarded ;  the  remainder  of  it  was  in  the 
banks  and  sub-treasury,  and  circulating  alone  without  bank- 
notes in  California.  If  it  were  practicable,  on  a  return  to 
convertibility,  to  limit  all  bank  loans  to  seventy-five,  or  at 
first  eighty  per  cent,  of  deposits,  all  the  hoarded  gold  would 
take  its  place  by  the  side  of  bank-notes,  and  the  full  benefit, 
not  of  a  metallic  basis,  but  of  a  metallic  limitation  to  the 
issue  of  notes  and  to  the  use  of  the  reserve  obtained.  Be- 
fore this  can  be  done,  writers  on  money  and  leading  bankers 
must  be  convinced  of  the  truth  of  my  demonstration.  That 
they  will  be  in  process  of  time,  I  cannot  entertain  a  linger- 
ing doubt. 

John  B.  Howe. 


OO^TTENTS. 


INTRODUCTION. 

PAGE 

The  subject  of  production  and  exchange  vastly  complex ;  excess  of  pro- 


duction anywhere  blocks  the  exchanges  1 

Production  on  credit ;  bank  credit  does  not  circulate  ....  2 
Paper  supplies  the  place  of  coin ;  convertibility  alone  insufficient      .       .  3 

New  science  needed  4 

Production  on  credit  5 

Deposits  expand  with  production  6 

They  are  a  consolidation  of  money  reserves  .'7 

Banks  do  not  deal  in  debt  7,  8 

The  money  unit  9-12 

Fallacies  crystallized  in  terms  12 

Mercantile  theory  of  intrinsic  value  in  gold  13 


DEFINITIONS  AND  TERMS. 

Want  of  precision  in  terms  ;  what  a  com,modity  is,  and  what  a  service      .  14 

What  overproduction  is  ;  what  absolute  necessaries  are  ;  bank  debt       .  15 

Bank  debt  the  result  chiefly  of  production  on  credit ;  has  no  objective  real- 
ity as  money  15,  16 

Bank-notes  equivalent  in  their  character  of  money  units  to  units  of  gold 

and  silver  ;  money  not  a  commodity  16 

Value  of  a  commodity  ;  conventional  value  of  metal ;  units  of  money  are 

the  units  in  the  denominator  of  a  valuing  ratio  at  every  sale       .  .17 

Quantity  of  money  does  not  determine  prices,  but  quantity  and  circulation ; 

necessaries  18 

The  word  Commodity  should  be  banished  from  economical  science,  unless 
limited  or  extended  in  its  application  18 


SOME  OF  THE  NEW  THEORIES  PROPOUNDED. 

Advantages  resulting  from  the  use  of  gold  and  silver  as  money  .  .  19,  20 
The  distribution  of  gold  and  silver,  bank-notes  and  commodities,  and  the 

supply  of  the  latter  20,  21 

How  the  value  of  a  commodity  must  be  reckoned  .  .  .  .  21,  22 
Absurdities  of  the  mercantile  theory  of  intrinsic  value  .       .      .23,  24 


xxvi 


CONTENTS. 


PA6£  . 

The  circulation  of  money  may  be  artificially  increased  through  payments 


to  labor  24 

Production  increased  chiefly  by  the  aid  of  loans  25 

Inconvertible  notes  in  France   .26 

Falsity  of  the  doctrine  of  M.  J.  B.  Say  and  his  followers  as  to  overproduc- 
tion  26,  27 

Conditions  which  render  overproduction  possible  ....  28-r31 
The  remedy  31 


CHAPTER  I. 


DEVELOPMENT  OP  MONEY  AND  ITS  USES. 

The  invention  of  money ;  a  mode  of  measuring  the  value  of  commodities 

in  its  inception  33,  34 

Valuation  must  be  by  units  at  the  second  stage  of  development,  as  well  as 

the  first  35 

The  difference  is,  that  the  second  stage  localizes  and  limits  the  ideal  or  ab- 
stract unit,  and  thus  gives  it  conventional  value  in  place  of  one  of  the 
commodities  35-37 

The  doctrine  that  bank  reserve  ought  to  vary,  the  logical  result  of  the 

mercantile  theory  of  a  commodity  value  in  gold  and  silver  coin      .  37,  38 

The  doctrine  that  convertibility  is  sufficient,  false.  The  perfection  of  me- 
tallic money  lies  in  its  distribution  and  its  limitation ;  hence  converti- 
bility should  be  carried  far  enough  to  insure  the  latter     .       .       .  37-39 

The  English  S3^stem  ;  why  the  plan  of  the  Bank  of  England  has  failed  ;  it 
cannot  be  explained  upon  the  mercantile  theory  of  gold  and  silver  as 
commodities,  in  bank  reserve  39-44 

Why  gold  has  not  risen,  and  why  silver  has  not  fallen  in  value  as  money  42,  43 

The  difference  between  money  and  commodity  values ;  the  former  can  be 
fixed  because  it  is  only  a  unit  value  in  a  ratio  or  equation  ;  the  latter 
cannot  because  it  is  a  commodity,  and  quantity  is  essential      .       .  43'-45 

Productive  energies  of  English-speaking  people ;  the  problem  is,  to  har- 
monize production  45 

It  has  become  necessary  to  demonstrate  that  bank  reserve  makes  all  pay- 
ments, and  is  alone  drawn  upon  by  checks       .....  46-50 

Bullion  ratios  can  be  changed  by  general  consent ;  purchasing  power  must 

be  apportioned  between  gold  and  silver  53 

The  natural  ratio  ought  to  be  adopted  as  nearly  as  possible    .       .       .53,  54 

The  prevailing  idea,  in  respect  to  the  steadiness  of  metallic  money,  right    .  55 


CHAPTER  II. 

THE  PRIMARY  CAUSE    OF  BANKING   AND  COMMERCIAL    CRISES  EXPLAINED 
UPON  AN  ENTIRELY  NEW  THEORY. 


The  original  cause  56-60 

Fallacies  embodied  in  the  terras  "  overtrading,"  "  speculation,"  etc.     .  57-61 


CONTENTS. 


XXvil 


PA6B 

Overproduction  entails  loss  from  its  commencement    ....  60 

The  loss  is  disguised  by  rise  in  unit  price  60,  61 

Bank  contraction  is  not  the  cause  63 

In  the  absence  of  money,  four  co-factors  would  demonstrate  loss ;  money 

conceals  the  demonstration  63,  64 

Non-redemption  of  bank  liabilities  out  of  the  commercial  world's  stock  of 

coin  cause  ;  its  effects  66 

The  post-auxiliary  causes  which  accelerate  and  magnify  industrial  and 

commercial  crises  67,  68 

Tendency  to  unequal  production  increased  by  the  very  fact  of  its  artificial 

introduction,  through  increased  loans  to  producers  on  credit  .  ^-^^  69 
How  tariffs  and  taxes  may  aid  towards  a  crisis  .  .  .  .  (  69,  70\ 
The  consequences  of  an  industrial  and  banking  crisis  ....  '"■TD 
Its  progress  and  development,  illustrated  by  diagram  .  .  .  .  71 
Loss  is  not  the  cause,  but  a  result ;  the  cause,  a  misdirection  of  energy  .  74 
Defective  monetary  systems  of  Great  Britain  and  the  United  States  fur- 
nish the  conditions  which  enable  the  active  cause  to  work       .       .  74-77 

Mr.  McCulloch's  policy  77 

Expansion  of  production  ;  consumption,  and  contraction        ...  77 
Gold  and  silver  may,  when  in  bank  reserve,  cause  expansion  of  circulation  79 
Production  and  consumption  were  nearly  balanced  in  Adam  Smith's  time  79 
American  and  French  currency  ;  Michigan  agricultural  and  Westeni  free- 
bank  currency  80 

*'  Money,"  "  exchanges,"  "  intrinsic  value,"  etc.,  but  chaos,  without  ex- 
planation  80 

Immense  masses  of  treasure  in  China ;  prices  there  are  steady  because 

production  is  steady  81,  82 

Theorists  who  favor  inconvertible  paper  money  83 

The  operative  credit  which  leads  to  crisis  is  the  extra  circulation  of  money 

through  increased  production  83 

Science  of  Production  and  Exchange      .  84 


CHAPTER  III. 

THE  THEORIES  OF   MILL  AND  PRICE,  AS  TO  THE  CAUSES  OF  BANKING  AND 
COMMERCIAL  CRISES. 

Mr.  Price's  theory   .  85 

Mr.  Mill's  theory  ;  credit  the  active  cause,  according  to  his  and  Mr.  Price's 

theory  86,  87 

The  English  mind  wedded  to  the  idea  conveyed  by  "  overtrading  "  .  .87 
The  office  of  money  is  to  pay  labor  as  well  as  to  distribute  its  fruits  .  87,  88 
Rise  and  fall  of  prices  in  consequence,  resulting  from  payments  to  labor, 

not  of  credit,  but  of  money  88 

The  agricultural  base  line        .       .       . '  89 

Mr.  Price's  theory  of  deposits  89 

Set-offs  are  not  payments  90 

Deposits  arise  from  production,  and  not  sales  merely  .      .      .      .     90,  91 


xxviii 


CONTENTS. 


FAGB 

Bank  reserve  increases,  on  the  other  hand,  through  sales  of  the  articles  pro- 
duced by  the  aid  of  bank  loans,  to  consumers  .....  91 
How  money  acts  on  prices   .94 


CHAPTER  IV. 

VALUE  AND  PRICE. 

Value  and  price  are  in  reality  the  same ;  intrinsic  value  a  contradiction 

in  terms  95 

Value  is  an  equation  expressing  the  terms  of  exchange  between  two 

things  95 

Intrinsic  value,  if  it  means  anything,  must  mean  intrinsic  utility  and  lim- 
ited supply  95,  96 

Commodity  value  of  the  material  of  money  absorbed  in  the  money  value  .  96 
In  like  manner  the  money  value  of  bank-notes  and  credits  is  extrinsic  .  96 
And  depends  upon  the  quantity  of  other  things  it  will  exchange  for  .  96,  97 
Opinion  of  bankers,  merchants,  and  manufacturers,  as  to  rise  and  fall  of 

prices  99 

Absolute  necessaries  cannot  be  overproduced,  nor,  upon  the  average,  rela- 
tive necessaries,  because  the  latter  would  not  support  the  laborers    99,  100 
Increased  production  of  precious  metals  will  not  raise  prices  fast  enough 

to  do  any  injury  unless  largely  in  excess  of  any  past  production        .  100 

Overproduction  the  cause  of  rise  in  prices  100 

The  fallacy  of  mercantile  value  in  money  conservative  in  its  influence, 

where  the  money  is  kept  out  of  circulation  by  its  means       .       .  100 

Bank  loans  furnish  money  and  not  credit  101 

They  furnish  money  to  labor,  which  soon  finds  its  way  to  bank  reserve ; 
the  important  fact  is  payment,  and  not  whether  money  actually  moves 

out  of  the  reserve  101 

Fallacy  upon  which  the  English  Bank  Act  of  1844  is  founded       .  101,102 
Metallic  reserve  would  be  unnecessary,  if  production  were  balanced  by 
consumption ;  excess  the  result  of  the  operation  of  two  compound 

factors  103 

Harmony  of  production  essential  103 


CHAPTER  V. 

BANKING  IN  ENGLAND,  AND   EXPANSION    AND    CONTRACTION    OF  CIRCULA- 
TION, UNDER  THE  BANK  ACT  OP  1844. 

Banking  in  England  is  like  banking  in  the  United  States,  in  nearly  all 

essential  particulars ;  the  difference  104 

Circulation  takes  place  inside  as  well  as  outside  of  banks;  circulation  is  in 
all  cases  a  delivery  of  units  of  money,  or  transfer  of  the  right  to 
them  ;  balancing  of  debts  a  result  only  104,  105 

The  fallacy  in  calling  gold  coin  a  commodity  merely  because  the  unit  and 
its  bullion  may  happen  to  coincide  in  value  105 


CONTENTS. 


XXIX 


PAOE 


The  change  introduced  by  the  Bank  Act  of  1844 ;  its  effect    .       .      105,  106 


Bank  credits  are  the  result,  of  loaning  deposits  109 

If  not  stopped  at  a  definite  point,  they  vary  without  reference  to  the  re- 
serve, and  therefore  without  reference  to  outstanding  circulation   109,  110 

Mercantile  credit  not  analogous  to  bank  credit  Ill 

A  bill  of  exchange  cannot  take  the  place  of  money ;  it  is  an  instrument  to 

put  money  in  circulation,  and  a  bank  loan  pays  it       .       .       .  .112 
It  cannot  take  the  place  of  money,  because  bills  of  exchange  cannot  be 
redeemed  by  bills  of  exchange ;  as  one  kind  of  money  is  always  re- 
deemed with  another,  or  money  in  one  place  with  money  in  another 

place     .       .       .  112 

Bankers' credits  and  guaranties  will  not  pay  wages  .  .  .  .114 
The  true  object  of  a  reserve;  a  greater  power  than  money  causes  rise  of 

prices  114,  115 

Analysis  of  the  circulation  of  money  ;  three  kinds  116 

What  English  banks  deal  in ;  what  purpose  banking  reserve  as  actually 

kept  answers  in  England  and  the  United  States        .       .       .    117,  118 
Actual  depreciation  of  the  unsold  products  of  labor  ;  how  the  deprecia- 
tion is  masked  for  a  time  118 

On  what  kind  of  credit  production  is  founded  119 

Necessity  of  rigorously  adhering  to  the  theory  that  all  money  possesses 
conventional  value  only,  in  order  to  perceive  clearly  that  prices  depend 

upon  production,  consumption,  and  circulation  119 

Clearing  verifies  the  theory  119,120 

If  production  and  consumption  balance,  the  expansion  and  contraction  of 

the  circulation  of  money  will  balance  122 

The  Bank  Act  has  failed  in  its  object,  because  the  metallic  units  of  money 
in  the  reserve  are  controlled  by  instead  of  controlling  the  units  of 

credit  in  deposits  123,  133 

Steadiness  the  paramount  advantage  of  a  circulation  of  gold  and  silver     .  124 
To  understand  fully  why  the  Bank  Act  has  failed,  it  is  essential  to  learn 
under  what  conditions  gold  and  silver  possess  this  steadiness,  and 

under  what  conditions  they  do  not  124-128 

It  is  harder  to  establish  the  right  rule  as  matter  of  fact  than  to  prove  it  .128 
Sound  banks  of  issue  are,  comparatively,  self-regulating  .  .  .  128,  129 
The  advance  of  production  ;  the  reason  why  banks  of  deposit-loan  are  not 

self-regulating  in  respect  to  loans  130-132 

Adam  Smith's  opinion  in  relation  to  the  volume  of  bank-notes      .       .  129 

Items  of  bank  clearings  132 

A  due  limitation  of  all  units  of  money  requires  as  a  condition  that  metal- 
lic units  shall  form  a  definite  portion  on  the  average  of  all  the  units 

fn  circulation  129 

Units  of  mercantile  credit  might,  but  in  point  of  fact  do  not,  circulate   .  133 
The  English  banking  crisis  of  1866  and  the  English  commercial,  indus- 
trial, and  banking  crisis  of  1874-75    133-143 

Investments  in  cotton  planting  134 


Fallacies  in  the  theory  of  the  act  . 
Abundance  of  metal  in  the  reserve 


106-124 
108 


XXX  CONTENTS. 

PAQB 

Production  of  absolute  necessaries  cannot  be  unduly  stimulated  by  ris- 
ing prices  134 

Artificial  derangement  of  the  distribution  of  metallic  money  a  cause  of 

local  rise  of  prices  136 

Steadiness  of  metallic  circulation,  lost  by  the  artificial  contrivance  of  bank- 
ing, requires  an  equally  artificial  arrangement  of  banking  reserve  to 

restore  it      ....  136 

Brief  statement  of  the  causes  of  the  failure  of  the  Bank  Act  .       .  135-142 
Definite  quantities  of  the  precious  metals  would  go  into  coin  and  manu- 
facture, if  Iheir  distribution  equally  in  the  tracks  of  commerce  were 

not  interfered  with  135 

All  loans  produce  an  expansion  of  circulation  137 

What  an  English  bank  deals  in  137 

Credit  and  debt  138 

Why  the  reserve  pays  all  checks  138,  139 

The  mistake  of  the  authors  of  the  Bank  Act  arose  from  supposing  the  va- 
riation of  gold  to  be  that  of  a  commodity  instead  of  that  of  a  series  of 
metallic  units,  when  used  by  buyers  to  purchase  labor  as  well  as  com- 
modities  141 

And  hence  the  true  objective  point  was  limitation,  in  order  to  insure  steadi- 
ness to  the  highest  degree  possible  by  the  aid  of  gold  .  .  .  141,  142 
The  true  principle  of  variation,  therefore,  was  that  the  circulation  of 
money,  or,  in  other  words,  loans,  should  be  made  to  vary  with  gold  in 
the  reserve,  instead  of  the  latter  being  made  to  vary  with  the  for- 
mer   140-142 


CHAPTER  VI. 

BANKING  IN  THE  UNITED  STATES. 

In  point  of  true  science  writers  have  not  defined  excess  of  issues  .  .143 
Whether  one  bank  can  control  the  issues  of  other  banks       .       .  143-146 

When  circulation  is  in  excess  145,  146 

Sound  banks  of  issue,  where  there  are  no  banks  of  deposit-loan,  are  com- 
pelled to  keep  their  issues  limited  by  metallic  money  ....  145 

The  true  object  of  this  limitation  144 

Of  banks  combining  the  functions  of  issue,  deposit,  and  discount  in  the 

United  States  146 

Banking  a  common  law  right  146 

The  theory  of  the  founders  of  the  Bank  of  England  and  English  as  well 
as  American  bankers  and  writers  upon  the  subject  of  money  and  ex- 
change is  that  banks  deal  in  debt  147 

It  has  been  maintained  with  great  vigor  and  force  by  Professor  Bonamy 

Price  147 

To  say  that  a  bank  deals  in  debt  has  no  more  real  meaning  in  point  of 

sound  logic  than  to  say  that  it  deals  in  coufidence       .       .       .  .147 
The  use  and  the  value  of  gold  as  money  alike  conventional ;  conventional 
value  controls  and  absorbs  mercantile  value  148 


CONTENTS. 


xxxi 


PAGE 

Gold  is  not  worth  what  it  buys  by  reason  of  the  labor  in  producing  it,  but 

conventional  value  causes  labor  to  be  employed  for  that  purpose        .  148 

Bank  coffers  are,  as  a  rule,  amply  stored  with  metal,  not  only  to  meet  all 

ordinary  calls,  but  with  much  more  149 

The  true  oflSce  of  bank  reserve  is,  therefore,  not  merely  that  of  a  consoli- 
dated fund,  but  to  limit  the  circulation  150 

The  mistake  lies  not  in  supposing  bank  loans  to  be  founded  on  credit  and 
confidence,  but  in  supposing  that  credit  and  confidence  and  metallic 
commodity  enter  into  the  exchanges  150,  151 

The  essential  difference  between  gold  coin  and  inconvertible  bank  debt     .  151 

The  distribution  of  metallic  money  is  in  the  tracks  of  commerce,  and  not 

of  production  151,  152 

Expansion  of  circulation  under  banks  of  issue,  deposit,  and  discount,  in  the 

United  States,  compared  with  that  taking  place  under  banks  of  issue  152 

Banks  disturb  the  natural  distribution  of  the  precious  metals    .       .  .153 

France  requires  more  than  England,  and  England  more  than  the  United 

States   .       .  .154 

The  benefit  of  metallic  limitation  of  circulation  lost  unless  the  metallic 
units  are  allowed  to  distribute  themselves  according  to  the  laws  of 
commerce  153 

Steady  prices  might  be  obtained  with  a  "  credit "  currency,  if  production 
were  steady  153,  154 

The  theory  that  unsteady  prices  arise  from  want  of  harmony  in  production 

established  by  the  author  a  new  one  155 

The  theory  that  overproduction  is  impossible  is  true  only  in  a  general  (or 
abstract)  sense ;  because  it  is  true  in  a  general  sense,  commercial 
crises  come  and  cause  a  rectification  of  excess      ....  155-157 

The  paramount  forces  which  control  all  production        .       .       .  .157 

Rigorously  exact  analysis  of  the  causes  and  conditions  which  bring  about 

expansion  of  production  through  bank  loans    ....  158-161 

**  Clearings "  help  to  create  and  maintain  the  fallacy  that  banks  deal  in 
their  own  debt  instead  of  that  extra  or  additional  circulation  or  use  of 
money,  in  excess  of  the  exchanges  of  commerce  and  industry  which 
would  be  possible  in  the  absence  of  banks  161-164 

Summary  of  banking  in  the  United  States  164 

Under  banks  of  issue,  deposit,  and  discount,  without  any  regulation  by  re- 
serve, bank  debt  is  redeemed  out  of  a  reserve  having  no  relation  to 
commerce  164 

All  banks  redeem  out  of  their  reserve  164 

The  reserve  makes  all  loans,  and  its  equation  always  is  Deposits  minus 

Deposit  Loans  equal  Reserve  1 64 

The  important  difference  between  the  banking  of  banks  of  issue  only  and 
banks  of  deposit  loan  consists  in  the  ratio  of  reserve  to  liabilities,  and 
the  mode  of  replenishing  the  reserve  165 

The  important  part  played  by  savings  banks  in  the  grand  business  of  pro- 
duction  165, 166 

All  money  substantially  the  same  166 

The  practical  question  for  every  banker  to  answer  before  making  a  loan  163 


xxxii 


CONTENTS. 


PAOI 

The  true  proportion,  upon  sound  principles,  between  written  bank  debt  and 
coin,  in  circulation  outside  of  banks,  and  bank  debt  by  book  and  coin 
reserve  166 

Harmonious  production  167 

The  guaranty  of  the  maintenance  of  conventional  value  in  metallic 

money  167,169 

Demonstration  of  the  fact  that  banks  deal  in  the  extra  circulation  or  use 
of  money  which  can  be  given  it  in  excess  of  that  given  it  by  deposit- 
ors, and  not  in  credit  or  debt  169,  170 

What  kind  of  money  the  banks  of  the  United  States  put  in  circulation  170,  171 

Deposit  and  discount  banking  only  one  among  other  possible  phases  of 
loaning  money  (by  means  of  an  extra  or  additional  circulation)  out  of  a 
consolidated  reserve  171 

The  best  kind  of  bank  to  carry  out  the  principle  of  a  regulated  reserve  in 

the  United  States  172,190 

Bank  debt  over  and  above  reserve,  plus  176 

Banking  reserve,  as  a  total,  is  the  sum  of  the  money  reserves  of  all  de- 
positors, which,  if  not  in  banks,  would  be  (in  the  shape  of  metal  and 
bank-notes)  in  pockets,  tills,  and  safes ;  and  bank  reserve  makes  the 
same  payments  reserves  in  pockets,  tills,  and  safes  would  make  if  there 
were  no  bank  loans  184,  185 

The  monetary  systems  of  the  United  States,  Great  Britain,  and  France, 

represented  by  inscribed  square  and  polygons  185 

All  banking  reserve  ought  to  be  metallic  186 

The  national  banks  should  be  retained  172 

Banking  reserve  is  the  money  of  commerce  paid  in  by  consumers  who 

were  sellers  before  they  were  buyers  186 

Weak  banks  of  issue,  in  the  absence  of  all  deposit  loans,  demonstrate  their 

weakness,  and  cannot  conceal  it  186 

But  their  notes  are  now  constantly  redeemed  for  them  by  banks  of  de- 
posit-loan, and  bank  debt  by  book  given  in  exchange  for  them  .  186,  187 

The  redemption  is  completed  by  the  checks  and  drafts  of  deposit-loan 

banks,  and  thus  each  bank  virtually  redeems  for  all  other  banks  .  .186 

What  kind  of  practical  political  economy  required  for  the  nations  of  the 

Anglo-Saxon  family  188 

Deposits,  including  reserve,  in  the  view  of  true  economical  and  monetary 

science,  belong  to  depositors  190 

Banks  can  no  more  deal  in  their  own  credits  or  debts  than  a  house  can 

stand  in  the  air  190 

It  were  well  if  they  could,  because  they  would  then  be  banks  of  issue,  and 

their  reserve  would  regulate  itself  184 

CHAPTER  VII. 

REDEMPTION  OF  CURRENCY. 

Fallacy  involved  in  the  assertion  that  bank-notes  ought  to  be  redeemed  in 
metal  because  it  has  intrinsic  value  as  a  commodity,  which  the  notes 
have  not,  conceals  the  true  object  of  redemption  in  point  of  science    .  191 


CONTENTS. 


xxxiii 


PAGE 

The  value  of  all  money  is  of  the  same  kind ;  all  money  value  is  conven- 
tional  191,  192 

Monetization  gives  and  demonetization  takes  away  its  value  more  or 

less  193 

Money  possesses  no  value  in  itself,  because  its  value  lies  wholly  in  what  it 
buys ;  it  is  mathematically  certain,  therefore,  that  it  has  no  value  as  a 

commodity  194,  195 

Taxation  of  money  in  bank,  and  bank  stock  194 

Monetization  and  demonetization  are  merely  modes  of  transferring  con- 
ventional value  from  one  kind  of  material  to  another       .       .  .196 
A  check  is  the  voucher  to  a  banker  for  paying  on  depositor's  account .  .196 
The  value  of  wheat,  if  used  as  money,  would  be  so  far  entirely  conventional, 

because  all  money  must  value  and  pay  in  the  character  of  units  .  197,  198 
By  a  mathematical  necessity  conventional  value  can  only  be  stated  in  the 

form  of  abstract  units ;  conventional  value  is  in  itself  an  abstraction  196,  198 
The  banks  of  Venice  and  Amsterdam  furnish  practical  proof  to  this  effect  199 
The  money  unit  is  ideal,  and  limited  either  by  the  material  which  supplies 

the  units,  or  by  commodities  199 

What  redemption  of  a  currency  is  200 

National  redemptions  cost  nothing,  because  the  value  of  all  money  lies  in 
what  it  will  procure,  and  the  new  metal  or  material  in  which  the  old  ^ 
money  is  redeemed  acquires  value  as  fast  as  the  old  material  can  lose 

it   200, 201 

Absolute  utility  in  any  material  makes  it  unfit  for  money  ....  201 
Policy  of  the  United  States  in  reference  to  funded  debt   ....  201 
Holders  of  money  have  been  sellers  of  products  personally  or  representa- 
tively  203 

Value  of  gold  coin  being  debased  by  the  issue  of  substitutes,  redemption 
alone  cannot  compensate  for  the  debasement ;  redemption  must  there- 
fore have  some  other  object  than  to  furnish  commodities  possessed  of 

intrinsic  value   205 

Conversion  by  exchange,  of  mercantile  into  bank  debt  ....  206 
A  banker  does  not  loan  his  credit  by  this  exchange ;  he  loans  the  use  of  the 
money  of  his  depositors,  and  takes  mercantile  bills  and  notes  in  ex- 
change ;  he  guaranties  his  depositors  against  loss  by  reason  of  his  act 
through  his  credit  with  them,  and  his  capital  ....  206,  207 
If  there  were  no  money,  and  he  received  deposits  of  commodities,  the  nat- 
ure of  his  loans  and  guaranties  would  be  substantially  the  same       .  207 

Absolute  necessaries  cannot  be  overproduced  207 

Mere  credit  can  by  no  possibility  bring  on  a  banking  and  industrial 

crisis  207 

The  manner  in  which  credit  temporarily  checks  the  operation  of  the  well 
established  law,  that  there  can  be  no  excess  of  production,  by  failure 

to  maintain  purchasing  power  20S 

Purchases  on  credit  cannot  raise  general  prices  '     .  208 

It  is  a  fallacy,  therefore,  to  assert  that  commercial  crises  arise  from  excess 

of  credit   208,  209 

Bills  of  exchange  and  checks  do  not  buy  merchandise,  unless  there  is 

money  behind  them  for  which  they  can  be  exchanged        .       .       .  209 
c 


xxxiv 


CONTENTS. 


PAOB 

They  cannot  properly  be  called  money,  because  they  are  soon  exchanged 

either  for  gold,  bank-notes,  or  banker's  credit  209 

Bank  credit  cannot  take  the  place  of  money  without  a  reserve  ;  it  is  the 

measure  of  economy  of  the  precious  metals  and  bank-notes        .  .210 

Bank  loans  are  mostly  made  to  producers  211 

Say's  doctrine  of  the  impossibility  of  overproduction  212 

Population  and  absolute  necessaries  abreast  212 

Rise  of  prices  comes  through  the  circulation  of  money,  and  disguises  the 

actual  depreciation  of  commodities  213 

The  three  fallacies  on  which  the  credit  theory  (of  bank  dealings),  in  oppo- 
sition to  the  money  theory,  are  founded  213 

No  excess  of  credits  in  reference  to  production  ;  the  excess  becomes  such, 
only  by  the  inability  of  commerce  and  consumption  to  keep  pace  with 

production  213 

The  three  fallacies  which  are  at  the  bottom  of  the  theory  of  mercantile 

value  in  money  214 

The  money  unit,  whether  designated  by  a  given  weight  or  measure,  or  by 

a  name  which  does  not  refer  to  weight  or  measure,  is  ideal  only  .  215 
Least  variation  in  the  prices  of  absolute  necessaries       .       .       .  .215 

Local  redemption  of  money  ,  .217 

Conducted  upon  the  same  principle  as  the  national  or  universal  redemp- 
tion  217 

London  clearings  217,  218 

Kedemption  being  only  an  exchange  of  one  kind  of  money  for  another, 

even  gold  is  redeemed  in  England  (by  depositing  it)  with  bank  credit  218 
Transfer  of  bank  credit  from  A.  to  B.  is  only  the  registry  of  the  move- 
ment of  gold  in  the  reserve  from  A.  to  B.,  or,  what  is  the  same  thing, 

of  his  right  to  it  219 

The  founders  of  the  Bank  of  England,  regarding  gold  coin  as  a  commodity 
and  a  standard,  failed  to  perceive  that  what  they  called  bank  credit 
was  only  the  bank  registry  of  the  actual  circulation  of  money  which 

had  been  deposited  in  the  reserve  219 

American  banking  system  substantially  like  the  English  before  1844  .  .  219 
What  sound  banks  were  subjected  to  prior  to  1857,  when  exchanges  were 

in  favor  of  clearing  centres,  through  depreciated  currency      .       .  220 
Gold  in  London  is  not  a  regulator  of  its  own  circulation    .       ,       .  .221 
It  is  made  a  kind  of  ballast  only,  and  its  movement  regulated  through  in- 
terest rates   221 

Prices  depend  upon  the  amount  of  circulation,  even  of  gold,  and  gold  in 
the  Bank  of  England  circulates  in  the  reserve,  in  subordination  to 
bank  credits,  instead  of  controlling  by  its  circulation  the  creation  of 

bank  credits   .  2i21 

Redemption  an  infallible  test  of  money  221 

The  initial  movement  of  currency  221 

All  loans  to  manufacturers  and  merchants  are  loans  to  producers  in  excess 
of  all  their  own  money,  and  the  loans  to  producers  of  absolute  neces- 
saries, as  such   221,  222 

Bills  of  exchange  are  not  money,  because  they  are  not  redeemed  with  bills  222 


CONTENTS. 


XXXV 


PAGE 

The  return  movement  of  money  out  of  circulation,  when  goods  have  been 

bought  by  consumers  222 

Accommodation  bills  222 

Temporary  auxiliaries,  towards  overproduction  223 

Real  value  an  essential  in  the  selection  of  material  for  money,  only  for  the 

purpose  of  maintaining  steadiness  in  the  number  of  units        .       .  224 

Adam  Smith's  demonstration   225 

The  mercantile  theory  so  called  225 

Eifect  of  the  discovery  of  America  upon  production  ....  225,  226 
The  advantages  of  a  metallic  circulation,  as  shown  by  France  .  .  227 
The  final  test  of  what  constitutes  money  is  not  its  original  cost,  but  its 

cost  to  the  owner,  and  that  it  is  always  redeemable  Avith  commodities 

which  have  cost  actual  value   227,  228 

Labor  does  not  measure  values,  but  values  equalize  labor  ....  229 
Overvaluation  of  one  of  the  precious  metals,  and  metallic  circulation  in 

the  markets  of  overvaluation  230 

Redemption  of  bank-notes  and  the  fallacies  connected  therewith  .  230,231 
Redemption  declared  by  certain  writers  to  be  an  end  in  itself ;  this  is  a 

fallacy  .       .       ^  .231 

Gradual  gain  of  gold  in  purchasing  power  232 

The  ratio  of  metallic  production  to  existing  mass  of  metal  being  small, 

maintains  steady  purchasing  power  in  metallic  units    ....  232 


CHAPTER  VIII. 

PRODUCTION,    OVERPRODUCTION,    ILL-DIRECTED   PRODUCTION,  PRODUCTION 
ON  CREDIT,  AND  SPECULATION. 

Production  the  foundation  of  commerce ;  what  it  is  233 

What  labor  is  ;  what  capital  is        .       .      -  233 

Commerce  ;  in  a  general  sense  is  a  branch  of  production  ....  233 
Money  is  the  conventional  commodity  by  means  of  which  it  is  effected  233,  234 
There  is  a  natural  tendency  to  invent  and  use  money  as  well  as  language  234 
A  commodity  employed  for  purposes  of  money  necessarily  ceases  to  be  a 

commodity  subject  to  the  common  law  of  supply  and  demand  .  .  234 
Money  resolves  itself,  therefore,  into  a  series  of  units,  and  commodities  can 

only  be  valued  and  exchanged  by  units  so  long  as  money  is  used  .  234 
All  money,  whether  that  of  the  precious  metals  or  inconvertible  notes, 

values  in  the  character  of  units,  in  all  equations  of  exchange      ,  234,  235 
Because  money  is  never  consumed,  if  it  can  be  paid  out  for  labor  faster 
than  the  products  of  labor  can  be  sold,  it  follows  that  in  its  unit  char- 
acter it  must  depreciate  in  exchangeable  value  as  to  commodities       .  235 
A  crisis  in  production  must,  therefore,  necessarily  result        .       .     235,  236 
Why  overproduction  in  any  quarter  is  upon  the  average  impossible      .  236 

Average  price  results  from  average  production  286 

The  system  of  exchange  one  of  action  and  reaction  236 

Limit  to  the  productive  powers  of  land ;  what  land  is  first  cultivated       .  236 


xxxvi 


CONTENTS. 


PAGE 

The  capacity  of  the  United  States  to  produce  necessaries ;  overproduction 

and  ill-directed  production   236,  237 

Fallacies  arising  from  use  of  terms  236 

Average  expenses  of  living  and  maintenance  of  capital  absorb  all  but  a 

small  percentage       ...   237 

Danger  of  bankruptcy  ;  cotton  culture  in  the  East  237 

Unproductive  investment  not  the  cause  of  commercial  crises  .       .       .  237 

Crisis  of  1866;  crisis  of  1873    237,  238 

M.  Say's  abstract  demonstration  238 

Labor  at  the  plow  ;  steady  wages ;  fallacy  in  the  assertion  that  unproduc- 
tive investment  is  an  active  cause  instead  of  being  only  a  result  of  in- 
vestments   238,  239 

False  idea  of  those  who  maintain  such  a  doctrine,  that  the  producers  of 
relative  necessaries  have  thrown  away  their  time,  instead  of  being 

only  ahead  of  time  239 

An  actual  fall  of  overproduced  commodities,  as  valued  in  equations  of  ex- 
change for  commodities  not  overproduced,  would  be  always  apparent, 
in  the  absence  of  money,  from  the  very  commencement  of  overpro- 
duction  239 

Money,  by  producing,  on  the  contrary,  as  production  progresses,  an  ap- 
parent rise  in  money  value,  disguises  the  real  fall  in  commodity  value, 
through  increase  of  circulation,  until  the  reaction  of  a  crisis  sets 

in   239,  240 

The  borrowing  of  money  in  order  to  increase  production,  for  a  time,  there- 
fore, and  up  to  a  crisis,  raises  general  prices,  whereas  if  producers  bor- 
rowed necessaries  themselves,  instead  of  the  money  to  buy  them  with, 
the  more  they  borrowed  the  higher  in  price  they  would  rise  and  their 

own  products  fall  240 

Production  on  credit  and  speculation  240 

Why  the  author  calls  it  production  on  credit  240 

Sacrifice  of  overstock   240,  241 

With  steady  prices  there  must  be  always  harmony  of  production  .  .  241 
With  steady  prices  fewer  failures  and  less  speculation  ....  241 
There  cannot  be  a  fair  distribution  of  wealth  and  capital  when  a  large 

proportion  of  business  men  fail  through  fall  in  prices       ...  241 
The  distribution  of  wealth  in  England  and  the  United  States    .       .       .  241 
False  ideas  of  labor  in  respect  to  the  responsibility  of  capital  for  the  sup- 
posed wrongs  of  labor  thus  engendered   241,  242 

Steadiness  of  wages  in  France  242 

The  use  of  money  is  itself  founded  on  credit  242 

Whoever  has  sold  commodities  for  money  stands  credited  with  commodi- 
ties, if  he  wishes  to  buy  242 

Expansion  of  credit  242 

Its  contraction,  and  the  contraction  of  circulation  ....  242,  243 
The  contraction  of  circulation  the  subjective  result  of  a  power  higher 

than  the  circulation  of  money  itself   242,  243 

Money  is  always  and  everywhere  abundant,  when  the  forces  of  production 

are  ready  to  expand  243 


CONTENTS. 


xxxvii 


PAGH 

Steady  prices  a  result  and  not  a  cause  :  they  may  be  lost  by  a  consolida- 
tion of  numerous  reserves  of  money  into  one,  and  loaning  extensively 
while  at  the  same  time  furnishing  depositors  all  the  money  they  ask  243 
This  cannot  be  done  while  money  is  left  in  the  hands  of  its  owners  as  com- 
merce distributed  it   243,  244 

Credit  sales  only  raise  the  price  of  the  articles  sold  on  credit  .       .       .  244 
Mr.  Mill  erroneously  calls  the  resulting  recoil  of  prices  in  such  a  case  a 
commercial  crisis,  whereas  it  is  nothing  of  the  kind,  because  it  relates 
not  to  commodities  and  prices  generally,  but  to  the  particular  com- 
modity purchased  on  credit  and  its  price      .  ....  244 

Mr.  Mill  did  not  carry  his  analysis  far  enough        .  .       .     244,  245 

The  grand  social  problem  of  the  day  ...  ....  245 

Constant  repetition  of  the  abstraction  that  there  can  be  no  overproduction 
has  through  the  great  complexity  of  the  subject  kept  back  investiga- 
tion  245 

In  what  kind  of  production  vast  numbers  of  British  and  American  work- 
men were  employed  between  1865  and  1873    ....       245,  246 
Absolute  necessaries  and  relative  which  cost  a])solute  necessaries       .      .  246 
To  affirm  that  loss  through  an  exchange  of  credits  is  the  cause  of  a  com- 
mercial crisis  is  to  affirm  that  the  final  result  is  the  cause  of  the  final 

result  246 

The  whole  matter  so  complex  that  it  requires  rigorous  analysis  .  246,  247 
How  imports  on  the  one  hand,  and  how  home  production  on  the  other, 

might  have  modified  the  crisis  of  1873    248 

Steady  prices  in  England  with  unsteady  prices  in  the  United  States  on 
the  one  hand,  .and  steady  prices  in  the  United  States  with  unsteady 
prices  in  England  on  the  other,  would  have  materially  modified  the 

crisis   248,  249 

Capital  and  not  labor  suffered  the  resulting  losses  249 


CHAPTER  IX. 

INTEREST,  RENT,  AND  TAXES. 

What  interest  and  rent  are  250 

Money  no  more  real  capital  than  real  commodity  250 

Money  may  be  called  conventional  capital  only  in  the  sense  that  its  owner 
is  entitled  to  exchange  it  for  an  as  yet  indefinite,  because  not  desig- 
nated, amount  of  real  capital  250 

It  is  immaterial,  in  point  of  science,  whether  the  units  of  money  be  me- 
tallic or  paper,  except  as  to  purchasing  power  and  steadiness     .       .  250 
Money  is  unproductive  because  it  is  not  real  capital      ....  251 
Abstractly  speaking,  therefore,  it  is  not  properly  taxable  ....  251 

Unjust  discriminations  against  banking  capital  251 

Abstractly  speaking,  income  ought  to  be  assessed,  because  income  pays  251,  252 

The  different  kinds  of  interest  252 

Radical  difference  between  bank  loans  and  most  loans  secured  by  land  253,  254 
Interest  is  paid  out  of  rents,  profits,  and  sometimes  capital     .       .      .  253 


xxxyiii 


CONTENTS. 


PAGE 

The  lender  is  the  borrower's  partner  when  there  are  contingencies    .      .  253 

Loss  in  a  national  point  of  view   253,  254 

Why  land  bears  so  large  a  part  of  the  burdens  of  taxation       .       .  253,  254 

Effect  of  taxation  upon  interest  255 

Of  what  products  those  who  live  by  taxation  consume  most      .       .       .  255 
Production  on  credit  invites  heavy  taxation,  and  pays  more  than  it  is 
able  until  a  commercial  crisis,  and  then  throws  its  load  upon  other 

production   255,  256 

How  assessments  for  taxation  ought  to  be  made  256 

Interest  paid  by  producers  on  credit  257 

The  purchase  of  labor  and  raw  material  which  cost  labor  with  cash  (not 

borrowed)  cannot  produce  a  commercial  crisis  257 

It  is  the  purchase  of  labor  and  raw  material  by  the  aid  and  with  the 

proceeds  of  bank  loans  257 

It  is  immaterial  whether  the  purchase  be  made  with  gold  eagles  or  (were 

it  really,  as  it  is  not,  used)  bank  credit  257 

Because  bank  loans  are  in  excess  of  all  others  possible,  the  scale  of  pro- 
duction and  that  of  bank  loans  rise  and  fall  together  ....  259 
Interest  is  steady  when  production  is  steady,  and  rises  with  the  increase  • 

and  falls  with  the  decrease  of  its  volume  259 

This  variation  results  chiefly  from  variation  in  the  risk,  and  intensity  of 

demand  for  the  means  of  holding  overstock  259 

The  demonstration  of  the  causes  of  fluctuation  in  bank  interest  is  the 
demonstration  already  given  of  the  unit  theory  of  money  and  the  fact 
of  overproduction  :  fluctuation  follows  from  these      ....  259 

The  phrase,  quantity  of  money  ;  its  meaning  259 

Wealth  is  not  absolute,  but  relative  259 

Inequalities  in  the  distribution  of  capital  and  its  fruits  essential  to  civiliza- 
tion  259 

What  is  the  highest  condition  of  wealth  259 

Interest  is  the  share  in  the  profits  of  production  paid  to  the  lender  by 

the  borrower,  and  sometimes  is  taken  in  advance        ....  259 
Interest  paid  banks  is  their  stipulated  share  of  profits  in  that  additional 
in  excess  of  all  production  otherwise  possible,  which  their  loans  ena- 
ble producers  on  credit  to  effect  259 

The  highest  condition  of  wealth  possible  is  the  utmost  possible  advance 

of  production,  so  long  as  it  proceeds  with  harmony  in  all  its  parts     .  260 
Civilization  cannot  exist  without  inequalities  in  the  distribution  of  capi- 
tal, and  consequently  more  or  less  of  what  is  called  luxury        .       .  260 
Unsteadiness  of  production,  and  consequently  of  profits,  interest,  and 

prices,  causes  excessive  variations  in  the  expenditures  of  luxury       .  260 
Interest  is  the  fixed  share  of  the  capitalist  in  the  profits  of  the  produc- 
tion on  credit  taking  place  by  the  aid  of  his  loans      ....  260 
Bank  intc>rest  is  the  share  of  the  banker  or  stockholders  in  the  profits  of 
that  additional  production  on  credit  which  cannot  take  place  without 
bank  loans,  and  the  additional  circulation  they  thus  give  to  the  money 

of  any  country  260 

Additional  production  takes  place  through  bank  loans,  and  interest  could 


CONTENTS. 


xxxix 


PAGE 


not  be  paid  to  banks  at  all  were  it  not  for  this  additional  produc- 


The  profit-fund  out  of  which  interest  is  paid,  although  thus  increased,  is 


And  all  producers  share  gain  and  loss,  as  do  also  all  lenders  .  .  .  261 
Gain  or  loss  is  a  lottery,  but  the  most  prudent  make  most  gain  .       .       .  261 

What  is  essential  in  order  to  maintain  steadiness  261 

Why  banks  of  issue  cause  less  circulatiou  of  money  upon  credit,  and 
therefore  less  production  upon  credit,  than  banks  of  deposit  and  dis- 
count  '.261 

This  is  easily  demonstrated  ;  why  it  is  so  261 

Excess  of  loans  through  banks  of  issue  may  nevertheless  occur  .  .  261 
There  is  a  limitation  to  their  issues  short  of  a  banking  crisis  .  .  .261 
Rates  of  interest  steadier  with  banks  of  issue,  and  why  .  .  .  .261 
Steadiness  of  production  chief  cause  of  steadiness  of  interest .  .  262,  263 
Indefinite  exchange  of  relative  necessaries  only,  through  money  as  an 
auxiliary,  would  produce  no  important  result  in  removing  the  block- 
ade of  the  exchanges  between  absolute  and  relative  necessaries  .  .  263 
As  production  of  absolute  gains  upon  that  of  relative  necessaries,  rates  of 

interest  become  steadier   263,  264 

Taxes  rise  as  interest,  wages,  prices,  and  government  expenses  rise  .       .  264 
The  result  would  be  the  same  if  the  excess  were  found  on  the  side  of  ab- 
solute instead  of  relative  necessaries   264,  265 

Apparent  prosperity  increases  taxation  265 

Modes  of  taxation  265 

The  true  principle  of  taxation ;  double  taxation  .  .  .  .  265,  266 
Taxation  upon  the  income  derived  from  mortgages    ....  266,  267 

Taxation  falls  upon  all  income  268 

Protected  production  269 

Steady  rates  of  interest,  as  well  as  steady  prices,  important  for  all  pro- 
ducers   ;       .       .       .  270 

Borrowed  money  pays  for  the  larger  part  of  all  production  of  relative 

necessaries  270 

Barter  out  of  the  question  in  a  state  of  civilization  271 

No  barter  between  the  East  and  West  in  the  United  States,  nor  between 

the  United  States  and  other  countries  271 

Tariffs,  taxes,  and  improvements  in  machinery  are  not  either  jointly  or 

severally  the  cause  of  commercial  crises  271 

The  question  of  questions  for  the  United  States  is  the  distribution  of  its 

productive  population   271,  272 

Commercial  crises  could  never  occur  if  barter  would  answer  the  purposes 

of  civilized  men  ;  money  is  indispensable  in  all  exchanges      .      272,  273 
The  objective  point  of  perfection  in  all  exchanges  is  abundance  without 
excess ;  human  science  can  only  point  out  the  plan ;  practical  skill, 
caution,  and  prudence  must  accomplish  the  rest      ....  273 

How  the  objective  point  is  approached  in  France  273 

Savings  banks  in  the  United  States  273 

It  is  immaterial  whether  labor  receives  gold  sovereigns  or  bank-notes  from 

producers  on  credit,  so  far  as  overstock  is  concerned  ....  274 


tion 


260,  261 


nevertheless  one  total 


261 


xl 


CONTENTS. 


PAGE 

The  real  difference  is  not  between  the  use  of  what  the  economists  call  bank 
credit  (or  bank-notes)  and  gold  and  silver,  but  between  production  by 
the  aid  of  money  borrowed  and  production  by  the  aid  of  money  not 
borrowed,  which  has  been  received  from  sales  to  consumers  .  .  274 
In  the  case  of  production  with  cash  received  from  sales  to  consumers, 
labor's  products  have  been  exchanged ;  in  the  case  of  production  by 
the  aid  of  loans,  they  have  not  been  exchanged,  but  on  one  ( the  loan) 
side  they  are  yet  to  be  produced  and  may  not  find  a  market  .  274,  275 
M.  Say's  theory  practically  false  ;  the  cause  of  overstock  and  the  reaction 

which  remedies  it,  complex  276 

Malthus'  theory  276 

The  absolute  necessaries  of  life  consumed  annually  276 

Why  there  can  be  upon  the  average  no  overproduction  ....  276 
Falsity  of  the  assertion  that  bank  credit  circulates  or  pays  ....  277 
What  circulates  and  pays  can  by  no  possibility  be  anything  but  money  .  277 
The  science  of  production  and  exchange  being  empirical,  that  of  interest, 

rent,  and  taxes,  which  are  branches  of  it,  must  be  the  same  .  .  277 
The  leading,  active  cause  of  disturbance  must  be  money;  small  notes  .  277 
The  English  banks  loan  gold  to  pay  labor,  and  the  effect  upon  production 

on  credit  is  the  same  as  if  they  loaned  what  is  called  their  credit       .  277 

Small  notes   277,  278 

What  a  purchase  from  a  manufacturer  outside  of  a  consumer's  market, 

the  market  of  true  commerce,  is  278 

There  are  three  exchanges  with  only  one  commodity  .  .  .  .  278 
Farming  land  and  loans   278,  279 


CHAPTER  X. 

CAPITAL,  LABOR,  AND  WAGES. 

Capital ;  fixed  and  quick  280 

Exchanges  through  the  medium  of  a  series  of  units  called  money  .  .  280 
Labor  runs  no  risk  of  market,  and  therefore  receives  less  as  its  share  of 

profits,  in  the  shape  of  wages,  than  the  successful  producer  .  .  281 
Inequalities  of  capital  absolutely  essential  to  the  employment  of  labor  .  281 
Increase  of  laborers  compensated  by  increasing  competition  of  capital  .  281 
Concentration  of  capital  no  grievance  of  labor  in  any  just  sense  .  .  282 
Capital  sunk  by  small  as  well  as  large  investments  in  railroads  .  .  .  282 
Increased  value  of  land  compensates  in  part  to  the  owners  of  land,  and  thus 

to  the  country  at  large,  the  losses  through  investments  in  railroads    .  282 
The  actual  cause  of  labor  against  capital  has  little  foundation     .       .  283 
The  real  grievance  of  labor  is  the  grievance  of  capital  in  many  particu- 
lars   283,  284 

Economical  science  has  hitherto  been  unable  to  give  the  true  answer  to 
the  complaints  of  labor,  because  it  maintains  that  production  must 
necessarily  proceed  harmoniously  in  all  quarters      .       .       .     284,  285 
It  is  utterly  impossible  that  ordinary  credit  can  be  the  cause  of  labor's 
grievance   284,  285 


CONTENTS. 


xli 


PAGE 

Wages  are  paid  out  of  capital  before  labor's  product  is  sold  .  .  .  285 
This  maintenance  of  labor  by  payment  of  wages  in  advance,  the  original 

cause  of  all  industrial,  commercial,  and  banking  crises  ....  285 
The  cause  operates  by  a  necessarily  resulting  increase  of  the  circulation  of 
money  through  wages,  as  compared  with  the  volume  of  commodities 
consumed,  which  conceals  the  real  depreciation  of  overproduced  arti- 
cles  285 

"Why  such  increase  of  circulation  impossible  without  banks,  and  with  me- 
tallic money  remaining  where  commerce  distributes  it .       .       .       .  285 

Dlustration  by  supposed  loans,  in  France   286,  288 

This  furnishes  a  rigorous  analysis  of  the  steadiness  of  a  metallic  circula- 
tion, and  of  the  conditions  which  maintain  it  on  the  one  hand  and  take 

it  away  on  the  other    .  288 

Wages  of  labor,  although  prepaid,  are  soon  reimbursed  under  such  a  cur- 
rency 288 

What  is  the  wages-fund  under  such  a  currency   288,  289 

The  credit  wages-fund  289 

How  wages  differ  from  other  income  289 

Capital  advances  wages,  and  must  lose  them  if  not  reimbursed  by  gross 

profits  out  of  sales  of  labor's  product :  labor  takes  no  risk       .     289,  290 

Mill's  wages-fund  '.289 

How  equilibrium  is  maintained  between  wages  paid  and  wages  reimbursed 
under  the  natural  as  distinguished  from  the  artificial  or  bank  circula- 
tion of  money  290 

Wages  paid  out  of  the  credit  wages-fund  of  loans,  reimbursed  frequently 
by  the  profit-fund  maintained  by  bank  loans  to  buyers,  who  buy  and 

hold  outside  of  a  consumer's  market  290 

Savings  banks  are  auxiliaries  in  maintaining  the  credit  wages-fund     290,  291 
The  manner  in  which  the  credit  wages-fund,  as  well  as  the  credit  profits- 
fund,  is  supplied  without  banks  on  the  one  hand,  and  with  banks  on 

the  other   291,  292 

All  bank  loans  above  average  are  loans  to  producers  on  credit  in  excess     .  292 
The  principal  or  most  important  office  of  coin  in  the  Bank  of  Amsterdam  292 
The  sum  total  of  bank  loans  is  the  total  of  deposits  minns  total  bank  re- 
serve  292 

What  this  total  is  in  respect  to  production  293 

What  bank  loans  in  England  and  the  United  States  show  with  mathemat- 
ical certainty  293 

Money  being  only  a  conventional  commodity,  and  therefore  a  series  of  lo- 
calized and  limited  units,  the  expansion  of  production  in  excess  of  con- 
sumption is  measured  by  the  expansion  of  circulation  in  excess  of  its 

contraction  293 

The  vast  sums  paid  as  wages  out  of  bank  loans  are  borrowed  by  pro- 
ducers, whether  manufacturers,  merchants,  railroad  builders,  etc., 
from  bankers,  who  give  by  the  loans  an  additional  circulation  to  the 
money  of  their  depositors,  and  through  bank  capital  guaranty  deposit- 
ors against  loss  by  reason  of  this  additional  circulation  .  .  293,  294 
Depositors  do  not  furnish  the  wages,  and  therefore  do  not  furnish  labor 


xlii 


CONTENTS. 


the  necessaries  which  wages  procure,  so  long  as  bank  capital  stands 

as  a  guaranty  fund  294 

Hence  it  is  absolutely  certain  that  what  banks  loan  to  their  customers, 
and  consequently  what  "  they  deal  in,"  is  that  extra  circulation  or 
use  of  the  conventional  commodity  or  localized  units  called  money 
which  is  in  excess  of  the  use  depositors  make  themselves,  by  purchases 
or  loans  295 

Labor's  wages  are  largely  expended  in  its  maintenance,  and  the  surplus 

goes  into  savings  banks   295,  296 

The  resulting  excess  and  want  of  balance  in  production  constitute  the  only 

true  or  real  grievance  of  labor  295 

Looking  only  at  the  real  exchanges,  the  wages  of  labor  paid  out  of  the  pro- 
ceeds of  bank  loans,  are  borrowed  in  an  economical  sense  out  of  com- 
modities on  hand  and  to  be  produced,  which  are  needed  for  consump- 
tion 29.5,  29f 

The  only  real  in  contradistinction  to  a  credit  wages-fund  is  that  part  of  the 
products  of  labor  which  it  will  itself  consume,  and  which  other  produc- 
ers will  take  in  exchange  296 

The  laborer  as  well  as  the  loaning  capitalist  and  producer  tread  on  danger- 
ous ground.    This  is  the  true  "  grievance  "  of  labor  ....  296 

What  a  steady  reserve  means  in  respect  to  production  and  consumption    .  296 

What  kind  of  protection  the  producers  as  well  as  laborers  of  the  United 

States  now  need  296 

Another  "  grievance  "  of  capital  as  well  as  labor  is  the  complex  nature  of 
money,  rendered  still  more  complex  by  banking,  M^hich  disguises  the 
real  forces  at  work  in  production,  exchange,  and  consumption      296,  297 

Mill  and  Price :  their  doctrine  that  what  acts  on  prices  is  credit,  whatever 
form  it  assumes,  and  that  a  bank  deals  in  what  they  call  credit :  the 
same  doctrine  maintained  by  economists  in  the  United  States    .       .  297 

Until  these  two  erroneous  propositions  are  rejected,  and  the  tAvo  proposi- 
tions in  contradiction  to  these,  maintained  and  established  in  this  book, 
are  admitted  and  acted  on,  the  most  important  benefit  of  a  banking  re- 
serve will  be  lost    .       .  '  297 

Prices  rise  through  the  extra  circulation  given  money  by  bank  loans  when 
in  the  ascending  scale,  not  only  from  unproductive  consumption  by  the 
aid  of  the  loans,  which  happens  more  or  less  at  all  times,  but  produc- 
tion in  excess  of  the  ability  of  producing  consumers  to  exchange     .  297 

Unproductive  consumption,  and  production  in  excess  of  the  consumption 
of  its  product,  equally  and  alike  (to  the  extent  of  their  respective  to- 
tals) increase  the  ratio  of  the  circulation  of  money  to  the  circulation 
(distribution)  of  commodities  for  consumption;  this  is  the  cause  of 
rise  of  prices  through  ill-balanced  production    .....  297 

Mill  and  Price  are  therefore  mistaken ;  mere  credit  cannot  raise  general 

prices   .     297,  298 

General  prices  could  never  rise  and  there  could  never  be  a  commercial 
crisis  if  banks  merely  loaned  their  credit,  and  there  would  be  no  neces- 
sity for  a  reserve,  because  there  could  be  no  overproduction  .       .       .  298 

There  could  be  no  overproduction,  because  the  price  of  overproduced  arti- 
cles could  not  be  maintained,  but  would  immediately  fall  .      .      .  298 


CONTENTS. 


xliii 


Such  is  always  the  real  in  contradistinction  to  the  apparent  fact ;  it  is  be- 
cause banks  loan  money  instead  of  credit  that  the  real  fall  is  disguised 
in  the  money  rise,  until  the  paramount  forces  at  work  behind  a  com- 
mercial crisis  demonstrate  to  the  contrary  298 

The  foundation  of  the  rise  is  not  a  loan  of  credit,  as  Mill  and  Price  and 
American  economists  aflBrm,  but  the  extra  circulation  of  gold  and  bank 
notes  from  the  reserve,  through  the  wages  of  labor  .       .       .     298,  299 

The  true  remedy  for  the  grievances  of  labor  299 

It  follows  from  the  foregoing  with  all  the  certainty  of  mathematical  anal- 
ysis that  the  circulation  of  money  can  be  no  more  rapid  than  the  cir- 
culation of  commodities  299 

Mill's  doctrine  of  rapidity  of  circulation  without  any  meaning       .       .  299 

The  real  movement  which  is  mistaken  by  Mill  and  others  for  increased 
rapidity  of  circulation  is  the  extra  or  additional  circulation  of  money 
required  in  order  to  pay  for  the  productive  consumption  of  labor  and 
capital  before  their  products  find  a  market    .       .       .       .       .  299,  300 

In  rigorously  exact  monetary  terms,  the  supposed  increased  rapidity  of  cir- 
culation is  an  expansion  of  the  circulation  or  paying  out  of  money 
by  means  of  loans,  in  excess  of  the  contraction  of  circulation  by  the  re- 
payment of  loans   299,  300 

Upon  the  average  there  is  no  excess  of  circulation,  because  upon  the  aver- 
age there  can  be  no  excess  of  production  300 

Coin  as  a  currency;  coin  and  bank-notes  as  in  Adam  Smith's  time;  and 

coin  and  bank-notes  economized  through  deposit  loans        .       .       .  301 

A  metallic  circulation  without  banks  prevents  all  excess,  as  it  were  by  a 

metallic  barrier  301 

The  productive  powers  of  France  well  balanced   302,  303 

Impossible  to  have  a  limitation  of  the  use  of  the  units  of  money  in  subor- 
dination to  consumption  as  well  as  production  by  a  metallic  banking 
reserve,  unless  artificially  regulated  ;  it  will  not  regulate  itself  .    302,  303 

Suspensions  of  the  Bank  of  England  by  orders  in  council  and  suspensions 

of  American  banks  the  same  in  principle  and  in  effect  .       .       .  302,  303 

IIow  the  English  system  of  banking  affects  the  United  States  .       .       .  303 

Valuations  in  the  currencies  of  one  country  corrected  in  the  currencies  of 

other  countries   303,  304 

The  subject  too  complex  to  be  understood  by  labor  without  study,  as  hap- 
pens in  the  case  of  all  sciences  hard  to  be  understood      .       .       .  304 

The  Ricardian  theory  of  rent  fanciful,  and  not  sound        ....  304 

Cultivation  of  land  and  rent  305 

Practical  demonstration  of  the  fact  that  credit  is  not  the  cause  of  indus- 
trial disturbances,  by  the  results  of  banking  in  France  as  they  would 
be  manifested  if  banking  were  introduced  there   ....  305,  306 

The  holder  of  money  a  producer  when  he  sells,  and  a  consumer  when  he 

buys  306 

All  money  paid  labor  or  capital  in  excess  of  sales  of  the  products  of  labor 

and  capital  is  therefore  in  excess  of  all  consumption,  demonstrated    .  306 

The  effect  upon  metallic  distribution  of  the  introduction  of  banking  into 

France ;  economy  of  metal  307 


xliv 


CONTENTS. 


PAGJ 

Scientifically  viewed  economy  of  metal,  is  in  the  sense  of  true  economy  im- 
aginary  308 

Set-ofFs  not  a  payment  in  banking,  but  the  result  of  payment       .       .  309 

Set-ofFs  of  mercantile  against  bank,  and  bank  against  mercantile  credits 
occur,  where  goods  produced  by  the  aid  of  bank  loans  are  purchased 
by  the  aid  of  bank  loans  309 

Sales  for  cash  or  to  consumers  on  the  other  hand  increase  bank  reserve, 

and  hence  there  is  no  set-ofF  arising  from  such  sales    ....  309 

The  set-ofFs  have  the  appearance  of  real  commerce,  and  have  led  British 
and  American  writers  to  suppose  that  banks  deal  in  credits  or  debts, 
and  that  deposits  arise  from  the  sale  of  commodities  ....  309 

But  real  sales  (commerce)  are  an  indirect  exchange  of  commodities  by 
means  of  money,  and  therefore  do  not  create  but  pay,  and  thus  re- 
tire bank  credits  and  debts  310 

What  amount  of  reserve  needed  in  the  United  States     .       .       .     310,  311 

Erroneous  opinions  in  respect  to  so-called  economy  of  metal     .       .  .312 

The  material  point  to  be  guarded  in  the  use  of  any  kind  of  money,  is  har- 
mony of  production  313 

A  want  of  harmony  is  loss  of  energy  and  productive  power  as  well  as 

bankruptcy  313,  314 

The  true  objective  point  would  be  observed,  did  not  the  auxiliary  exchange 

of  money  prevent  314 

The  presence  of  money  as  an  auxiliary  in  equations  of  exchange  and  the 
shadow  of  loans,  disguise  the  commercial  connection  between  bank 
reserve  and  production  on  credit  in  advance  of  consumption       .       .  314 

The  general  opinion  that  the  movement  of  bank  credits,  so  called,  arises 
from  buying  and  selling  commodities,  and  is  therefore  not  "  specula- 
tive," a  fundamental  misconception  or  non-perception  of  the  real  proc- 
ess  315 

The  opinion  that  an  exchange  of  gold  for  goods  is  an  exchange  of  com- 
modities, and  that  an  exchange  of  units  of  bank  debt  for  goods  is  a 
purchase  either  with  or  on  credit,  utterly  absurd        .       .       .  315,  316 

Gold  and  silver,  put  in  circulation  by  the  aid  of  bank  loans  and  paid  to 
labor  and  by  labor  put  in  circulation  and  paid  out  for  the  necessa- 
ries of  life  by  the  aid  of  deposit  and  discount  banking,  have  the  same 
effect  in  laying  the  foundation  of  a  commercial  crisis  as  bank- 
notes  315, 316 

The  record  of  production  on  credit  as  shown  by  bank  books     .      .  .316 


CHAPTER  XI. 

REGULATION  OF  RATES  OF  INTEREST  BY  LAW. 

Interest  has  no  relation  to  the  volume  of  money  because  it  has  been  dem- 
onstrated in  previous  chapters  that  money  possesses  no  mercantile 
value  and  is  therefore  not  a  commodity  317 

The  mercantile  theory  of  money  as  a  commodity  itself  instead  of  being, 
as  it  really  is,  only  a  process  of  exchanging  articles  of  merchandise,  or 


CONTENTS. 


xlv 


in  other  words  commodities,  by  means  of  limited  and  localized  units 
of  conventional  value,  measuring  the  values  of  all  commodities  rela- 
tively to  each  other,  and  taking  the  place  of  commodities  on  one  side 
of  all  equations  of  exchange  between  buyers  and  sellers,  is  the  founda- 
tion of  the  ideas  of  plenty  and  scarcity  of  money  as  distinguished  from 

plenty  and  scarcity  of  its  circulation  317 

Bank  discount  is  credit  interest  taken  in  advance,  and  the  fixed  share  of 
the  banks  in  the  final  result  of  production  on  credit    .       .       .  .317 

The  two  kinds  of  risks  banks  take  317 

Which  of  the  two  risks  is  greatest  318 

As  bank  loans  rise  the  rate  of  interest  rises ;  and  why  ....  318 
Bank  interest  cannot  be  regulated  by  law;  the  elements  of  irregularity  .  318 
Steadiness  of  rate  the  result  of  harmonious  production  ....  318 
The  risk  of  finding  a  market  for  the  results  of  labor  and  capital  brought 

about  by  the  aid  of  bank  loans,  grows  with  loans  .  .  .  .319 
In  principle  it  is  as  reasonable  to  fix  by  law  the  profits  of  the  borrower  in 

the  results,  as  those  of  the  lenders  319 

How  the  idea  of  prohibiting  usury  arose  originally  319 

Money  produces  nothing  itself,  and  hence  interest  is  only  a  share  in  re- 
sults  319 

CHAPTER  XII. 

ANALYSIS  OP  THE  TAXATION  OF  MONEY,  AND  ITS  RESULTS. 

Taxation  of  money  logically  results  from  the  theory  that  as  a  commodity 
it  possesses  mercantile  value,  and  is  an  end  in  itself,  instead  of  being 
only  means  to  an  end  321 

To  tax  money  is  double  taxation,  because  there  is  in  it  no  productive 

power  to  be  taxed  321 

Money  in  the  possession  of  individuals  (not  borrowed)  is  evidence  of  prod- 
ucts exchanged  (sold)  and  consumed  by  others  321 

What  taxation  of  depositors  and  deposits  really  is  321 

The  more  commodities  are  used,  the  higher  goes  their  price,  but  the  more 
money  is  used,  the  lower  goes  its  price  as  a  series  of  valuing  units,  in 
point  of  valuing  power  322 

By  the  clearest  demonstration  it  is  one  and  the  same  thing  whether  the 
money  taxed  is  in  the  tax-payer's  hands  in  the  shape  of  gold  coin,  or 
in  that  of  bank-notes  or  "  credit  in  bank"  322 

To  understand  with  all  the  clearness  of  demonstration  why  money  is  not 
properly  taxable,  we  must  go  back  to  the  original  idea  and  follow  it 
through  development   322,  323 

How  the  full  development  of  the  fundamental  idea  of  money  as  a  mere 
auxiliary  in  exchanges,  working  by  localized,  limited,  and  duly  dis- 
tributed units  of  valuation  and  purchase,  has  been  arrested,  not  in 
fact,  but  in  opinion   323,  324 

The  persistence  of  the  false  theory  of  mercantile  value,  nevertheless  to  a 
large  and  precisely  what  extent,  advantageous  in  maintaining  steadi- 
ness of  prices  324 


xlvi 


CONTENTS. 


CHAPTER  XIII. 


TARIFFS  AND  PRODUCTION. 

PAGE 

Protection  of  home  industry   .       .       .  325 

Tariffs  and  taxes  and  improved  machinery  and  processes  do  not  cause  com- 
mercial crises,  either  jointly  or  severally  325 

To  affirm  that  improved  machinery  and  processes  produce  them  M^ould  be 

to  affirm  that  real  advancement  is  retrogressive  325 

Tariffs  and  taxes  cannot  cause  them,  because  they  can  only  operate  in 
the  way  of  exhausting  the  means  of  buyers,  and  exhaustion  is  not  the 

cause  of  a  crisis   325 

The  true  cause  is  inability  to  sell  the  products  of  labor  to  cash  buyers   .  325 

Protection  of  home  industry  325 

Tariffs  and  taxes  help  to  exhaust  the  income  of  buyers  but  do  not  cause 

commercial  crises   325,  326 

The  unproductive  consumption  which  takes  place  through  taxation  .  .  326 
It  makes  no  difference  where  taxation  falls,  because  all  taxation  is  so  much 

exhaustion  of  income    .  327 

Tariffs  in  this  respect  are  therefore  like  all  other  taxation  .  .  .  328 
Tariffs  for  protection  of  the  industry  devoted  to  the  production  of  certain 

relative  necessaries,  act  injuriously  as  bounties  at  times       .       .       .  328 
If  tariffs  operate  as  bounties  for  a  long  period,  while  they  are  also  at  the 
same  time  taxes,  they  defeat  the  very  object  in  view,  while  they  in 
effect  take  the  property  of  one  producing  consumer  and  give  it  to 

another  328 

This  results  from  not  giving  to  the  American  producer  the  protection  of 

a  steady  currency,  which  he  needs  more  than  that  of  a  bounty  .       .  328 
The  changes  in  the  mode  of  taxation  by  tariff  which  are  needed    .     328,  329 
A  large  portion  of  taxes  levied  upon  raw  material  and  other  articles  im- 
ported, paid  out  of  profits  made  by  American  producers  upon  sales  of 
their  product  to  intermediaries  standing  between  them  and  consumers, 

before  the  product  finds  these  consumers   328,  329 

This  results  from  the  expansion  of  circulation        ....     328,  329 

It  is  in  reality  paying  taxes  out  of  a  credit  fund  330 

Sellers  as  well  as  buyers  have  a  voice  in  fixing  prices    ....  330 


CHAPTER  XIV. 

MONETARY   SYSTEM    AND  PRODUCTION  OF  FRANCE  :  HOARDING    IN  FRANCE 
AND  ELSEWHERE. 

France  has  no  established  system  of  maintaining  production  on  credit       .  332 

The  reason  is  that  loans  in  France  are  regulated  by  a  consumer's  market, 
because  money  loaned  can  be  paid  back  to  lenders,  no  faster  than  bor- 
rowers can  procure  it  by  sales  in  that  market  332 

The  military  fine  paid  Germany  out  of  the  proceeds  of  goods  sold  in  a  con- 
sumer's market,  where  there  was  no  blocking  of  the  exchanges  .      .  332 

The  true  secret  of  the  prosperity  of  France  under  adverse  circumstances  332 


CONTENTS. 


xlvii 


PAGE 

Her  money  —  bank-notes  as  well  as  coin  —  is  left  where  commerce  dis- 
tributes it ;  no  artificial  increase  of  its  circulation  through  banks       .  333 

The  natural  inequalities  in  the  distribution  of  Avealth  are  not  increased  in 
France,  by  production  on  credit  through  banks  and  sales  in  the  specu- 
lative markets  of  overstock  to  merchants,  who  do  not  know  that  in 
point  of  fact  they  are  speculators  333 

No  loss  of  productive  energy  in  France,  and  population  and  production 

approximate  their  limits  334 

M.  J.  B.  Say's  theory  of  the  impossibility  of  overproduction  not  so  surpris- 
ing therefore  334 

The  doctrine  nevertheless  false  335 

Production  on  credit  in  France  is  limited  by  the  possible  total  which  may 

be  on  loan  at  any  one  time  335 

Loans  vary  in  France  as  money  in  the  reserves  of  capitalists  varies,  but  in 
the  Bank  of  England  loans  vary  without  reference  to  banking  re- 
serve  335 

The  small  reserves  or  hoards  335 

Loans  could  not  be  increased  by  the  mere  banking  or  consolidating  of  the 

hoards  336 

What  would  be  essential  in  order  to  increase  them  and  thereby  produc- 
tion on  credit  336 

No  change  in  the  volume  of  loans  in  France  except  through  deposit  loans  337 

Deposit  loans  from  the  hoards  would  become  loans  out  of  the  reserve,  and 

they  could  never  become  loans  of  bank  credits  337 

The  system  introduced  generally  with  savings  banks,  would  be  substan- 
tially the  English  and  American  banking  system       ....  337 

No  one  could  with  any  pretense  of  reason  contend  that  the  French  banks 

were  dealing  in  "  credit  "  instead  of  money   337,  338 

But  the  notes  of  the  Bank  of  France  would  no  longer  "vary"  as  gold  va- 
ries  338 

Checks  and  entries  on  bank  books  would  not  be  the  payments  made  by 

depositors  but  only  the  vouchers  and  registers  338 

British  and  American  writers  mistake  effect  for  active  cause  when  they 

affirm  that  banks  deal  in  credits  or  debts   338,  339 

The  non-regulation  of  loans  by  bank  reserve  would  show,  when  production 
was  in  the  ascending  scale,  a  slight  but  constant  increase  of  payments 
out  of  banks  in  excess  of  receipts  338 

To  stop  loaning  the  money  of  depositors  in  all  banks  at  one  and  the  same 
stage  of  the  reserve,  as  compared  with  the  total  of  loans  in  France, 
would  be  the  only  method  of  approximating  under  banking  to  the  old 
stability  and  harmony  which  existed  before  the  introduction  of  bank- 
ing  337 

Would  France  or  the  commercial  Avorld  be  benefited  by  introducing  the 
English  or  American  system  of  banking  until  the  science  of  banking 
is  better  understood?   339,  340 

Why  the  enormous  issues  of  inconvertible  notes  in  France  have  produced 
so  slight  an  effect  on  prices  .       .       .   "  341 

The  fallacy  of  a  supposed  mercantile  value  in  gold  and  silver  money  had 


xlviii 


CONTENTS. 


PAGE 


a  conservative  effect  in  retiring  the  metal  for  a  time,  and  circulating 


Its  effect  in  such  a  country  as  China  where  there  are  vast  hoards  .  .  342 
The  theory  has  a  strong  hold  upon  the  human  understanding  .  .  .  343 
It  is  not  only  harmless  but  beneficial  in  the  cases  just  mentioned,  but  un- 
der the  fully  developed  banking  systems  of  England  and  the  United 
States,  it  ought  to  be  subverted  in  order  to  show,  by  the  clearest  dem- 
onstration possible,  that  the  most  important  office  of  bank  reserve  is 
limitation  of  bank  loans  343 


BULLION  VALUES  :  MONEY  VALUES  :  BULLION  AND  MONET  VALUES  COMPARED  : 
A  COMMERCIAL  CRISIS  THE  LIMITATION  OF  EXPANSION  FOR  GOLD  AS  WELL 
AS  PAPER,  UNDER  A  VARYING  RATIO  OP  BANKING  RESERVE. 

Misconception  of  the  true  relations  between  the  precious  metals  as  bullion  ; 
it  grows  out  of  the  mercantile  theory  of  money  as  possessing  mercan- 
tile value  in  the  character  of  a  commodity  345 

Mint  regulations  of  Germany,  France,  and  other  European  nations,  and 

of  the  United  States  345 

Erroneous  estimates  of  the  effect  of  those  regulations  founded  upon  the 

same  theory   .     345, 346 

Eisk  of  not  hitting  the  true  barter  rate  by  free  coinage  of  silver  in  the 

United  States  alone  347 

The  bullion  of  the  unit  is  not  the  unit  itself,  and  standard  in  the  sense  of 

a  mercantile  commodity  of  a  given  weight  is  impossible      .       .       .  348 

The  standard  possible  is  the  standard  unit  called  macoute,  dollar,  pound, 
or  franc ;  the  greater  the  amount  of  metal  in  the  unit  the  less  will  be 
the  whole  number  of  money  units ;  the  less  the  amount  the  greater 
will  be  the  number  of  money  units  348 

To  increase  the  quantity  of  metal  is  merely  to  divide  by  the  same  number 
the  units  of  a  ratio  consisting  on  the  one  hand  of  units  of  money,  and 
on  the  other  units  of  goods ;  to  decrease  the  quantity  is  on  the  other 
hand  to  multiply  each  set  of  units ;  the  ratios  and  quantities  are  not 
changed  in  either  case  348 

Use  of  precious  metals  in  arts  and  manufactures ;  the  principal  use  as 

money  controls  the  subordinate  one  as  commodity      .       .       ,       ,  348 

What  the  United  States  is  equitably  bound  to  do  348 

Upon  what  principle  the  two  metals  must  be  artificially  related  to  each 
other  in  order  to  carry  out  the  convention  by  which  both  are  used  as 
money  349 

The  relation  must  be  established  upon  the  simplest  principle,  and  that  is 

one  of  weight  349 

Intrinsic  qualities  are  entirely  eliminated,  because  they  have  no  relation  to 
the  use,  which  is  that  of  units  in  ratios  of  valuation  and  equations  of 
purchase  349 

If  buyers  and  sellers  had  to  stop  and  estimate  the  intrinsic  qualities  of  gold 


paper  in  its  place 


341,  342 


CHAPTER  XV. 


CONTENTS. 


xlix 


PAOB 

and  silver  in  coins,  as  well  as  commodities  bought,  there  would  be  no 

exchanges  but  those  of  common  barter  349 

If  gold  and  silver  are  bartered  as  commodities,  the  United  States  would 

pay  in  silver  at  its  London  barter  rate  as  compared  with  gold     .       .  350 
Historical  criticism  in  relation  to  the  use  of  the  precious  metals     .       .  351 
The  precious  metals  pay,  not  as  commodities  but  as  units  of  valuation  and 
payment,  quite  as  much  when  weighed  out  as  iinits  in  the  absence  of 
coinage  as  they  do  when  actually  coined  ;  they  never  pay  as  bullion  .  351 
The  utility  of  silver  and  its  comparatively  large  mass,  consume  much 
more  of  it  in  proportion,  and  thus  reduce  its  actual  total  in  the  shape 

of  money  and  manuafctured  commodity   351,  352 

This  is  the  reason  why  silver,  if  produced  on  the  average  at  the  rate  of  40 
pounds  to  one  pound  of  gold,  has  stood  to  gold  in  point  of  bullion 

value,  not  as  1  to  40,  but  1  to  15^  352 

The  reason  why  a  general  remonetization  of  both  metals  desirable        .  353 

The  duty  of  the  United  States   353,  354 

Why  French  silver  has  not  lost  purchasing  power  354 

Objections  to  free  coinage  of  silver  by  the  United  States        .       .     354,  35? 
Bullion  valuations  are  conditions  precedent  to  the  use  of  the  metals  as 
money,  not  because  quantity  of  metal  is  in  itself  important,  but  be- 
cause it  relates  to  the  number  of  units  to  be  furnished  by  each  metal 

in  ratios  of  valuation  355 

The  purchasing  power  of  the  units  of  the  precious  metals  as  money,  being 
alike  depreciated  by  circulation  in  excess  of  consumption,  and  some- 
times by  excessive  issues  of  inconvertible  paper,  the  metal  is  thus 
cheapened  in  its  exchangeable  relations  with  commodities  generally, 

and  more  of  it  is  carried  into  commodity  use  356 

The  value  of  the  unit  thus  controls  the  value  of  the  metal  .       .       .  356,  357 
Demonetization,  total  or  partial,  cheapens  metal     ....     357,  358 
If  gold  and  silver  were  everywhere  and  equally  money,  equal  values  would 
be  maintained  in  the  character  of  money,  as  well  as  of  commodi- 
ties   357,  358 

The  paper  issues  of  the  United  States,  Italy,  Austria,  and  Eussia  have  de- 
preciated metallic  money,  because  metallic  money  is  not  a  commod- 
ity but  a  series  of  units,  like  the  paper  issues  themselves  .       .     359,  360 
Money  value  is  a  matter  of  average  resulting  from  all  the  purchases  in 

the  commercial  world  361 

Objections  to  the  coinage  of  silver  have  no  proper  relation  to  its  purchas- 
ing power  as  to  commodities,  but  only  as  to  its  present  ratio  to  gold  362 
The  human  mind  is  incapable  of  conceiving  of  any  relation  between  all 
the  merchandise  and  all  the  metallic  money  in  the  world  but  that  of 
abstract  units,  and  in  respect  to  human  wants  no  other  exists  .     363,  364 

A  limited  amount  of  legal  tenders  365 

Gold  and  silver  ought  not  to  be  regarded  as  bullion  in  bank  reserve,  but 
as  units  of  money  limiting  the  units  of  bank  debt  resulting  from 

loans  365 

The  units  of  bank  debt  should  be  always  kept  in  proportion  with  the  units 
of  metal  upon  short  averages,  and  thus  controlled  by  those  units,  in- 
stead of  controlling  them   ,  365 

d 


1 


CONTENTS. 


CHAPTER  XVI. 

OF   LABOR  AS  A  MEASURE    OF  VALUE  :    DIVISION    OP    LABOR  AND    ITS  IN- 
CREASING EFFICIENCY. 

PAQE 

Labor  is  not  the  measure  of  values  in  any  just  sense  367 

Doctrine  of  Adam  Smith  ;  unit  of  labor  and  unit  of  time  .  .  .  367 
We  are  carried  back  by  that  doctrine  to  the  old  valuation  of  commodities 

by  each  other  367 

And  w^e  are  compelled  to  adopt  the  abstract  unit  for  the  purpose  of  esti- 
mating the  values  of  the  commodities  367 

Values  are  determined  by  the  action  and  reaction  of  demand  and  supply  367 
The  production  and  commerce  of  the  v^^orld  ought  to  be  looked  upon  in  the 

light  of  actual  facts  and  not  opinions  368 

The  absolute  necessaries  of  life  must  be  had  before  others  are  procured, 

and  the  absolute  vary  the  least  368 

The  absolute  must  control  the  relative,  and  does  so  maintaining  proper 

harmony  in  all  production,  if  there  be  no  artificial  disturbance  .       .  368 
It  is  questionable  whether  the  advance  of  modern  civilization  is  not  retro- 
gressive unless  harmony  can  be  maintained  369 

The  mischief  lies,  not  in  ordinary  mercantile  or  banking  credit,  as  com- 
monly understood,  but  in  production  on  credit  by  the  aid  of  money 

loans   369,  370 

It  results  from  more  buying  of  labor  than  selling  of  labor's  products    369,  370 
The  buying  comes  from  borrowing  money  on  merchants'  and  other  pro- 
ducers' credit,  and  it  is  in  effect  a  buying  of  the  commodities  con- 
sumed by  producers  and  laborers  by  the  aid  of  the  loans,  on  the  guar- 
anty of  the  bankers  370 


CHAPTER  XVII. 

BANK-NOTE-REDEMPTION  RESERVE  AND  BANKING  RESERVE  :  THEIR  RATIO 
TO  BANK  DEBT,  AND  THE  PROPER  PLACE  OF  KEEPING  THE  RESERVE  OP 
EACH  KIND. 

Deposits  are  the  total  or  consolidated  money  reserve,  composed  of  the 
money  reserves  of  all  depositors  371 

In  the  absence  of  consolidation  the  money  reserves  of  the  depositors  and 
all  other  money  holders  would  be  the  only  source  of  loans,  and  after 
the  consolidation  the  consolidated  reserve  is  the  source  of  loans  made 
by  depositors,  as  well  as  those  additional  loans  which  banks  are,  by 
reason  of  the  consolidation,  enabled  to  make  371 

Deposits  and  all  other  money  constitute  a  series  of  reserves  belonging  to 
money  holders  371 

No  assignable  limit  but  a  crisis  to  the  extent  to  which  bank  reserve  may 
continue  to  lose  metal  or  notes  to  pay  for  labor,  raw  material,  profits, 
and  charges  372 

Mr.  Price's  argument  against  the  policy  of  keeping  so  much  gold  in  the 
Bank  of  England,  not  surprising  therefore  372 


CONTENTS. 


li 


PA6B 

The  volume  of  loans  always  shows  the  extent  to  which  what  is  called  bank 

reserve  has  been  drawn  upon  373 

Banks  of  issue  in  Scotland  in  Adam  Smith's  time  373 

"Why  their  issues  were  limited  by  metallic  reserve  and  why  their  power  to 

sustain  production  on  credit  was  checked  by  it  .  .  .  .  373 
A  reserve  may  be  made  to  vary  like  gold  so  long  as  no  bank  loans  are 

made  out  of  it  374 

The  variation  in  banking  reserve  which  results  from  bank  loans  is  different 
from  the  former  because  the  variations  are  always  attended  with  in- 
crease of  power  to  put  money  in  the  reserve  in  circulation  by  the  in- 
crease of  bank  debt,  or  with  a  contraction  of  that  power  by  a  diminu- 
tion of  bank  debt  375 

The  ratio  of  bank  debt  to  reserve  is  therefore  always  the  material  point  in 

respect  to  production  on  credit  and  prices  375 

Crisis  of  1857  and  bank-debt  variations  of  that  period  furnish  practical 

proof  375 

Dlustration  of  the  difference  between  purchases  with  cash  not  borrowed 

and  purchases  by  the  aid  of  bank  loans  375 

Actual  sales  of  commodities  to  consumers  do  not  create  but  retire  deposits ; 

production  in  some  form  alone  creates  them  375 

Mr.  Price's  assertion,  that  deposits  arise  from  sales,  is  therefore  a  mistake  376 

Balancing  and  set-ofF ;  units  of  bank  debt  376 

Rigorous  analysis  requires  the  observer  to  look  behind  bank  movements    .  376 
Real  commerce  is  the  indirect  exchange  of  commodities  through  money, 
and  such  an  exchange  increases  the  ratio  of  bank  reserve  to  bank 

debt   376,  377 

In  the  absence  of  deposit  loans,  banks  of  issue  regulate  their  reserve  by 

self-acting  machinery  377 

Units  of  bank  debt  standing  to  the  credit  of  depositors    ....  377 

What  they  are  .377 

They  are  not  the  cause  but  the  result  of  production  on  credit  .  .  377 
Utterly  impossible  for  a  bank  to  deal  in  anything  it  has  not  received  un- 
less it  is  a  bank  of  issue  ;  hence  it  only  loans  out  of  its  reserve  .  .  378 
Supposed  case  of  a  bank  of  deposit  in  England  ....  378,  379 
Mr.  Price's  question  in  reference  to  supposed  surplus  of  metal  .  .  .  380 
What  the  general  government  ought  to  do  in  relation  to  the  reserves  of 

the  national  banks  381 

A  consolidated  reserve  in  the  city  of  New  York  for  the  national  hanks  .  381 
This  would  be  the  first  step  towards  regulated  reserve       .       .       .  381,  382 


CHAPTER  XVIII. 

THE  POLICY  OF  EXCLUDING  SMALL  NOTES  CONSIDERED:  ON  A  RETURN  TO 
CONVERTIBILITY-,  OUGHT  ALL  BANK-NOTES  UNDER  FIVE  DOLLARS  TO  GO 
OUT  OF  USE? 

The  answer  to  this  question  depends  upon  the  answer  to  the  question.  Is 
it  possible  to  regulate  banking  reserves  either  directly  or,  through  a 
central  redemption  of  bank-notes,  indirectly  1  383 


lii 


CONTENTS. 


PAOE 

The  mere  exclusion  of  small  notes  upon  the  principles  before  demonstrated, 


cannot  regulate  bank  loans  383 

Nor  can  they  be  regulated  by  a  huge  bank  383 

The  reason  is  that  regulation  does  not  end  with  bank-notes,  but  begins 

with  all  bank  loans  383 

The  regulating  function  of  the  old  United  States  Bank      .       .       .  383,  384 


A  large  national  bank  cannot  regulate  banking  in  the  true  sense  of  regula- 
tion, because  banking,  which  is  but  trading,  and  free  of  common  law, 
is  the  receiving  and  paying  deposits  and  making  bank  loans ;  this  is 
the  thing  to  be  regulated  and  not  merely  the  issue  of  bank-notes    .  384 

The  true  policy  is  to  retain  the  national  banks,  and  make  their  notes  re- 
deemable at  a  central  bureau,  and  to  fix  the  minimum  below  which 
the  reserve  of  each  bank  shall  not  go  385 

The  exclusion  of  small  notes  would  then  be  a  matter  of  no  importance, 
because  a  regulated  reserve  would  render  their  exclusion  unneces- 
sary  385 

The  English  system  of  regulating  bank-notes  by  gold  and  excluding  small 
notes,  instead  of  regulating  all  bank  loans  by  gold,  founded  on  an  en- 
tire misapprehension  of  the  true  office  of  a  metallic  reserve     .     385,  386 

Great  Britain  peculiarly  subject  to  banking  and  commercial  crises     .       .  386 

Scotch  banking  386 


CHAPTER  XIX. 

GOLD,  SILVER,  AND  OTHER  METALLIC  UNITS  OF  MONEY. 

If  only  one  metal  were  in  use  to  furnish  units  of  conventional  value,  pur- 
chase, and  payment,  the  total  purchasing  power  of  all  the  units 
throughout  the  commercial  world  would  be  an  abstraction  .      .       .  387 

What  is  and  what  is  not  capital   387,  388 

Taxation  of  money  388 

Security  by  quick  and  fixed  capital  388 

Fallacy  of  the  principle  of  taxing  money  389 

Double  taxation   389,  390 

Depreciation  of  one  kind  of  bullion  valued  in  another,  no  test  of  pur- 
chasing power  in  reference  to  commodities  390 

Gradual  changes  in  metallic  units  in  respect  to  quantity  of  metal      .  391 
Governments  cannot  change  the  value  relations  of  commodities        .  .391 
But  they  can  change  the  value  of  the  money  unit  in  its  relation  to  com- 
modities by  increasing  the  total  of  money  units,  while  producers  and 
banks  change  its  value  by  increasing  the  circulation  of  units  in  the 

reserve,  as  coin  is  "  economized  "  391 

The  value  of  bullion  in  relation  to  commodities  is  the  relation  of  its  me- 
tallic units  to  commodities,  and  therefore  rises  as  units  of  money  de- 
crease and  falls  as  units  of  money  increase  392 

International  economy  of  metal  392 

Metallic  production;  convention  in  respect  to  the  use  of  the  precious 
metals  as  money   393,  394 


CONTENTS. 


liii 


PAQE 

Dollar  is  the  standard  unit  of  the  United  States     .    '   .       .       .     393,  394 

Price  is  the  quotient  or  statement  of  a  ratio,  being  units  of  money  divided 

by  units  of  goods  394 

In  its  character  of  a  unit  the  unit  of  coin  as  well  as  the  unit  of  bank-notes 
is  intangible  and  abstract,  because  the  member  of  a  ratio  having  con- 
ventional value  only   395,  396 

Actual  relations  between  coined  units  of  metallic  money ;  between  the 
totals  of  those  units  and  the  masses  of  metal  not  coined  ;  and  between 
the  masses  not  coined  themselves  396 

The  production  of  silver  and  gold  397 

The  relative  masses  by  weight  of  silver  and  gold  which  have  been  manu- 
factured  397 

The  relations  by  weight  of  the  masses  after  the  demand  for  manufacturing 
purposes  is  supplied  397 

The  values  of  the  respective  masses  thus  left  reckoned  in  each  other  .       .  397 

With  both  metals  everywhere  and  equally  money,  the  value  of  the  metallic 
units  of  each  metal  would  be,  abstractly  speaking,  the  same,  and  prac- 
tically, on  the  average,  exactly  the  same,  local  vaTiations  in  respect  to 
demand  and  supply  of  commodities  excepted       ....  397,  398 

The  reason  is  that  purchasing  power  is  conventional  and  therefore  abstract ; 
the  units  of  both  metals  are  distributed  everywhere,  and  if  there  is 
less  of  one  sort  of  units  in  any  place  it  is  made  up  by  more  of  another ; 
the  purchasing  power  of  all  the  units  is  an  abstraction ;  divide  or 
multiply  the  whole  number  by  2  and  the  value  remains  the  same  397-399 

Single  barter  between  the  two  precious  metals  must  exist  before  both  can 
be  used  as  money  399 

Every  sale  is  a  valuation  by  ratio,  perfected  by  mutual  deliveries  through 
the  equation  of  exchange  399 

The  mistake  of  theorists  who  disregard  facts  and  whose  belief  is  controlled 
by  their  own  ideas,  lies  in  supposing  that  barter  exchange  between  the 
metals  follows  them  in  their  character  of  units  of  money,  thus  making 
monetary  science  a  science  of  contradictions       ....  399,  400 


CHAPTER  XX. 

FALLACIES  ARISING  FROM  THE  REDEMPTION  OF  CURRENCIES. 

Fallacy  No.  1  and  Fallacy  No.  2  401 

Theorists  who  put  opinion  in  the  place  of  fact  deny  that  bank-notes  are 
money,  and  insist  that  even  if  bank  credits  go  into  equations  of  ex- 
change between  buyers  and  sellers,  and  cause  exchanges  of  com- 
modities to  take  place,  they  are  not  money  401 

A  credit  in  bank  which  puts  as  much  coin  or  bank-notes  in  circulation  as 
if  the  owner  had  a  like  amount  of  coin  in  his  possession,  is  substan- 
tially money  401 

The  testimony  of  Adam  Smith,  in  relation  to  bank-notes  kept  by  dealers 

in  Scotland  402 

The  theory  of  Mill  and  others  that  bank-notes  and  bank  credits  have  no 

effect  as  such  on  prices  402 


liv 


CONTENTS. 


PAOB 

Intrinsic  value  founded  on  cost  of  labor  a  fallacy,  because  a  bank  credit 

costs  as  much  labor  as  does  a  like  sum  in  gold  402 

Title  deeds  and  certificates  may  be  regarded  as  property,  if  the  right  to 
property  passes  with  them  403 

The  fallacies  which  monetary  science  has  to  overcome  before  any  true 
science  can  be  founded  404 

One  of  these  fallacies  is  the  opinion  of  scientists  that  redemption  of  cur- 
rency is  an  end  in  itself,  instead  of  being  what  it  really  is,  an  exchange 
only  404 

CHAPTER  XXI. 

PREMIUM  ON  GOLD  AND  SILVER. 

Premium  in  the  United  States,  England,  and  France  under  inconvertible 

currencies  405 

If  metallic  money  were  a  commodity  it  might  in  one  sense  be  a  standard  406 

Being  only  a  unit,  as  a  bank-note  is,  or  a  series  of  units,  it  rises  and  falls 

in  value  with  all  money  units  406 

Fall  of  gold  as  well  as  of  all  money  units  in  exchangeable  value  between 

1861  and  1873,  in  the  United  States  406 

Mill's  doctrine  of  premium  ;  average  and  high  premium ;  loss  of  purchas- 
ing power  in  gold  406 

Rise  of  prices  through  bank  loans  depreciates  gold ;  loss  of  gold  by  the 
United  States ;  equilibrium ;  relative  values  of  coin ;  economy  of 
gold   407, 408 

Metallic  circulation  in  England  ;  prices  rise  and  fall  with  bank  reserve    .  409 

Range  of  prices  in  England ;  Mr.  Thomas  Tooke's  theory ;  the  theory  of 
the  buUionists  410,  411 

CHAPTER  XXII. 

VARIATIONS  IN  BANK-NOTE  CIRCULATION. 

What  banking  is  ;  the  two  kinds  of  banker's  debt  412 

Mr.  Price's  theory  of  a  crisis  ;  redundancy  of  production,  of  goods,  and  of 

circulation  413, 414 

Temporary  glut ;  England's  hazard  and  that  of  the  United  States    .  .415 
Production  of  absolute  necessaries  cannot  be  stimulated  in  excess  of 
population ;  redundancy ;  equilibrium ;  France  and  England  com- 
pared  415,  416 

Frenchmen  conservative  in  respect  to  banks ;  M.  Wolowski    .      .     416,  417 

CHAPTER  XXIII. 

FALLACY  IN  THE  USE  OF  THE  TERM  BANK  DEBT,  OR  BANK  CREDIT. 

The  mistake  of  the  founders  of  the  Bank  of  England,  of  English  and 
American  writers,  and  of  Mill  and  Price,  in  reference  to  bank  credit  .  418 


CONTENTS 


Iv 


PAGB 

A  deposit  in  bank  gives  the  same  command  over  the  field  of  production 

as  bank-notes  418,419 

Want  of  harmony  in  pit)duction ;  redemption  of  gold  and  silver      .      .  420 


CHAPTER  XXIV. 

COMPLEX  NATURE  OP  MONET. 

Money  the  most  complex  of  all  subjects  421 

The  purchasing  power  of  money   421,  422 

The  difference  between  mercantile  and  bank  credits  ;  the  former  arise  from 
sales  of  goods  on  time,  and  the  buyers  owe  for  goods  sold  ;  the  hold- 
ers of  deposits  do  not  owe  for  goods  sold,  and  may  or  may  not  owe  a 
bank  ;  full  paying  power  exists  in  deposit  credit        .       .       .    422,  423 

The  only  credit  in  the  case  having  a  mercantile  character  is  the  ability  to 
obtain  commodities  through  the  aid  of  bank  loans,  —  a  kind  of  credit 
which  attaches  to  any  loan  of  money  423 

Banks  are  the  instruments  by  which  additional  loans  are  made  over  and 

above  the  possible  volume  of  loans  in  their  absence  .       .       .      423,  424 

Demonstration  by  analysis ;  buyers  of  crops  424 

Adam  Smith's  comparison  of  money  to  a  bill  of  exchange ;  loans  in  the 

absence  of  money   425-427 

Prices  necessarily  steady  in  the  absence  of  money,  and  why ;  they  would 
be  equally  steady  with  money,  if  production  on  credit  could  proceed 
no  farther  than  it  could  without  money   427,  428 

Loans  are  made  mostly  to  producers,  but  they  are  paid  only  by  consum- 
ers in  an  economical  sense ;  this  is  the  cause  of  bank  expansion  .  429,  430 

Contraction  of  means  in  one  bank  becomes  sometimes  the  expansion  of 

means  to  another,  through  want  of  due  regulation     .       .       .  430,  431 

Loans  of  money  cause  expansion  of  circulation ;  payments  of  loans  con- 
traction of  circulation  ;  the  only  limit  to  the  expansion  a  crisis  .  431,  432 

The  enormous  prices  paid  for  English  iron  and  other  products  of  indus- 
try in  consequence  of  that  expansioq  ;  Mill  and  Price  say  buying  is 
the  cause  of  rising  prices,  whereas  expansion  of  production  is  the 
first  cause   433,  434 

Summary  ;  bank  expansion  arises  from  expansion  of  production      .       .  435 

All  money  is  but  a  series  of  reserves ;  without  loans  of  money  there  could 

be  no  crisis  435 

There  is  a  strong  tendency  in  production  outside  of  the  necessaries  of  life 
to  expand  ;  the  immense  loss  which  follows  excess        .       .      436,  437 

Local  redundancy  of  money  in  the  time  of  the  Roman  empire,  and  of  late 

in  Germany ;  advancing  prices  a  phantom       ....      437,  438 

They  stimulate  production ;  what  is  needed  for  the  United  States ;  pro- 
tection  439 

Money  m  use  is  but  a  process  ;  gold  and  silver  not  wanted  for  themselves 
merely,  but  to  furnish  steady  prices ;  the  equation  of  all  loans,  in 
respect  to  commodities  consumed   437-441 


Ivi 


CONTENTS 


CHAPTER  XXV. 

RELATIVE  VALUES  OP  DIFFERENT  METALS,  AND  COmI^ODITIES  OTHER  THAN 
METALS,  USED  AS  MATERIAL  FOR  THE  MANUFACTURE  OF  MONET  UNITS,  IN 
REDEMPTION,  EXCHANGE,  PURCHASE,  AND  PAYMENT. 

PAGE 

Two  schools  of  opinion  ;  mixture  of  truth  and  error  .  .  .  442,  443 
Rise  and  fall  of  prices  a  rise  and  fall  in  the  ratio  of  units  of  money  to  units 

of  commodities  ;  value  can  be  expressed  in  numbers  only  .  .  .  443 
Tendency  to  equality  of  compensation  for  labor ;  conventional  value  of 

precious  metals  443 

Value  lies  in'the  unit  only  ;  statement  of  value  relations  between  metals  .  444 
Variation  in  metallic  ratios  the  result  of  national  coinage  .  .  .  445 
Errors  of  the  school  holding  to  intrinsic  value ;  one  metal  ....  446 
Mr.  Smith's  letter ;  unit  of  weight  essential ;  all  commodities  would  be- 
come units  of  weight  or  measure,  if  not  needed  for  consumption  447,  448 
The  opinion  of  the  founders  of  the  Bank  of  England  ;  wheat  and  rye  as 

money   448-450 

Same  law  applies  to  the  precious  metals  ;  Mr.  Price's  opinion  in  respect  to 

bank  reserve  ;  the  purchasing  power  of  one  metal  cannot  be  fixed  .  451 
Remonetization  of  silver   452,  453 

CHAPTER  XXVI. 

CONTRACTION  AND  EXPANSION. 

Expansion  of  circulation  of  money  is  in  proportion  to  increase  of  produc- 
tive capital ;  increase  of  metallic  supply  has  had  no  material  effect, 
and  why  454 

Limitation  of  the  expansion  under  national  as  opposed  to  artificial  condi- 
tions ;  how  regular  metallic  distribution  is  arrested     .       .       .  454,  455 

Paper  money  and  deposits  ;  how  they  modify  metallic  distribution      455,  456 

"With  deposit  loans  not  absolutely  limited  by  metallic  reserve,  circulation 

expands  and  contracts  as  production  expands  and  contracts      .      .  455 

The  expansion  of  circulation  is  not  redundant  as  compared  with  produc- 
tion ;  it  becomes  redundant  only  when  production  contracts,  and  there- 
fore necessarily  contracts  with  it   455,  456 

How  expansion  and  contraction  occur  under  a  currency  of  silver  and  gold, 

and  how  under  that  of  bank-notes  456 

Gold  and  silver  limit  expansion  by  their  limited  number  of  units  and  their 
general  distribution  ;  units  of  bank-notes  limited  by  those  of  gold  and 
silver  thus  distributed  ;  in  what  way   457,  458 

Deposits  check  the  depreciation  of  bank-notes,  and  prevent  their  return 

for  redemption ;  crisis  of  1873    457-459 

The  law  of  expansion  and  contraction  459 

Some  of  the  bullionists  have  attributed  expansion  to  bank-notes  instead  of 
all  bank  loans ;  redundancy   460,  461 

An  estimate  of  the  average  expansion  of  units  of  money  available  for  cir- 
culation by  means  of  bank-notes  and  "  economy  "  of  metal       .      .  462 


CONTENTS. 


Ivii 


PAQK 

Possible  expansion  in  France  403 

Deposit  loans  interfere  with  redemptions ;  the  effect  of  paying  them  464 
Expansion  is  the  same  -whether  a  bank  pays  out  notes  or  not  .       .      464,  465 

The  expansion  is  masked  to  depositors  465 

Contraction  impossible  until  it  becomes  univ^ersal  466 

Bank-notes  do  not  interfere  with  the  distribution  of  the  units  of  money  as 

deposits  do  ;  and  why   467,  468 

The  difference  between  local  redundancy  and  general  expansion  .  468,  469 
The  process  of  gradual  expansion  throughout  the  commercial  world  .  469 
Depreciation  of  gold  and  silver  ;  local  and  national  expansion   .       .       .  470 

When  bank-notes  ought  to  be  retired   470,  471 

Bank-notes  which  ought  to  be  redeemed  are  deposited  and  give  rise  to  fur- 
ther loans ;  loss  of  reserve  relatively  and  absolutely        .       .      471,  472 
How  a  regulated  reserve  would  check  such  deposits          ....  473 
The  real  forces  at  work  behind  deposits  and  circulation  ;  bank-notes  under 
five  dollars  474 


CHAPTER  XXVII. 

THE  STIMULUS  TO  SPECULATIVE  PRODUCTION  AND  SPECULATION,  FROM  THE 
.  INCREASING  PERSONAL  MANAGEMENT  OF  CORPORATE  AND  FIDUCIARY  CAP- 
ITAL, 

The  vast  amount  of  capital  under  the  nominal  control  of  corporations ; 
the  real  control,  where  it  lies ;  stockholders  take  all  the  risks  without 


having  all  the  gains  475 

The  joint  grievance  of  capital  and  labor ;  the  result  unavoidable       .       .  476 
Management  of  railroads  ;  of  banks  ;  harmony  and  discord    .       .  476,477 
Failures  of  merchants  ;  the  source  of  their  losses  and  bankruptcy     .       .  477 
Northern  Pacific  Railroad  ;  the  importance  of  dispatch  in  business  removes 
safeguards ;  hence  the  great  importance  of  limitation  by  bank  re- 
serve   .477 


CHAPTER  XXVIII. 

THE  SPECIE  PAR  OF  GOLD  AND  SILVER ;  BALANCE  OF  TRADE. 

Export  of  gold  under  a  metallic  currency  without  banks  occurs  on  failure 
of  crops  ;  its  movement  natural  and  not  artificial  .... 

Demand  for  commercial  gold ;  balance  of  trade ;  economy  shown  by  bal- 
ance  

The  distribution  of  the  precious  metals  uniform  unless  disturbed  . 

The  first  par  of  purchasing  power  ;  the  second  par     ....  479, 

Artificial  rise  of  prices ;  Adam  Smith's  testimony  as  to  bank-notes 

Compensation  for  tax  on  commodities  ;  expansion  of  bank-notes  in  order 
to  equalize  prices  

The  natural  movement  of  gold  and  silver  in  the  tracks  of  commerce,  and 
the  impossibility  of  diverting  it  except  through  banks 

The  term  Par  


Iviii 


CONTENTS. 


CHAPTER  XXIX. 

STANDAED,  DOUBLE  STANDARD,  AND  METALLIC  SUPPLY. 

PAOl 

Standard  is  born  of  Commodity  ;  the  two  conventional  values  .      .      .  485 

Price,  Commodity,  and  Standard   486,  487 

The  variations  in  the  ratios  of  units  of  money  to  units  of  commodities  in 

equations  of  exchange  between  buyers  and  sellers  ....  487 
The  objective  point  the  highest  degree  of  steadiness  practicable  .  487,  488 
Credit  can  no  more  enter  into  equations  of  exchange  than  confidence  or 

hope  488 

With  gold  and  silver  alone,  and  no  banks,  the  borrower  can  produce  no 

more  than  can  the  lender,  without  selling  489 

A  rising  is  always  succeeded  by  a  falling  scale  of  prices      ....  489 
Metallic  money  evidence  in  holder's  hands  of  production  balanced  by  con- 
sumption  490 

Standard,  as  applied  to  either  of  the  precious  metals,  the  father  of  Premium  491 

Metallic  supply,  and  its  disposition  492 

The  increase  of  banks  has  more  effect  on  prices  than  metallic  supply    492,  493 

Limited  and  free  coinage   494,  495 

Coinage  by  the  United  States  ;  monetary  congress  ....  496-498 
Economy  of  metal ;  limitation  of  units ;  variations  in  equations  of  ex- 
change   498-501 

Banks  do  not  make  equations  of  exchange  between  buyers  and  sellers    .  502 

Valuation  and  exchange  503 

Commodities  are  still  valued  relative  to  each  other,  as  in  barter,  except  that 

the  unit  of  valuation  is  localized  in  another  commodity  or  thing  .  504 
Why  coin  is  exported  when  its  metal  is  undervalued  ....  905,  506 

CHAPTER  XXX. 

THE  PURPOSES  TO  \THICH  PRODUCTION  ON  CREDIT  IS  APPLIED,  ETC. 

Production  on  credit  a  new  term  ;  the  meaning  of  the  term      .       .       .  507 
The  vast  extent  of  the  subject ;  the  abstract  proposition  of  M.  J,  B.  Say, 
as  to  impossibility  of  overproduction ;  Adam  Smith's  doctrine,  that 

labor  is  the  measure  of  value   507-509 

Pr.oduction  on  credit  the  cause  of  commercial  crises       ....  510 

Deposits  show  the  cost  of  production  510 

The  doctrine  of  Mill  and  Price  511 

Production  on  credit  does  not  end  with  an  excess  of  such  articles  as  iron 

and  cloth  511-513 

Savings  bank  loans  ;  purchases  of  land  ;  purchases  which  are  made,  not  by 

bank  loans,  but  as  one  of  the  results  of  bank  loans  .       .       .       513,  514 

Bank-notes  are  not  the  cause  of  commercial  crises  515 

Railroads  :  where  the  most  disastrous  of  the  results  of  excessive  produc- 
tion on  credit  may  be  found  516,  517 

To  regulate  bank  debt  is  to  regulate  production  518 

The  movements,  both  substantial  and  speculative,  which  result  from  the 
use  of  the  credit  fund  519 


CONTENTS. 


lix 


PAGE 

Overtrading  is  not  a  cause,  but  a  result ;  case  of  a  mill  owner  and  mer- 
chant by  way  of  illustration  519,  520 

Deposit  and  discount  banking  like  nothing  but  itself     ....  521 
It  is  not  a  dealing  in  credit,  but  an  efficient  system  of  production  on  credit ; 
Great  Britain  in  1797 ;  additional  circulation  given  to  money  by  un- 
productive consumption,  and  productive  consumption  in  advance  of 

cash  markets   521-523 

What  a  crisis  is ;  no  proper  word  in  the  English  language  to  designate 

that  of  1873    522,  523 

Dividends  and  profits  declared  in  consequence  of  sales  of  products  which 
do  not  find  cash  markets ;  these  are  largely  devoted  to  still  further 

production  and  help  to  produce  a  crisis   523,  524 

The  objects  to  which  they  are  applied ;  what  the  average  credit  fund  is  524 
Mr.  Mill's  theory  of  mercantile  credit ;  the  economical  statement  .       .  525 
The  defective  reasoning  of  the  economists ;  they  reason  from  effects  in- 
stead of  causes   526,  527 

DISTRIBUTION  AND  CONSUMPTION  ON  CREDIT. 

Losses  in  England  and  the  United  States ;  what  might  be  easily  accom- 
plished by  the  United  States  in  respect  to  metallic  currency  .       .  529 

What  is  needed  for  the  United  States   530,  531 

Circulation  and  unproductive  consumption  in  France  ....  532 
M.  J.  B.  Say's  proof  of  the  fallacy  of  Adam  Smith's  opinion  as  to  labor  .  533 
Mistaken  views  of  the  results  of  silver  coinage  by  the  United  States  in 

consequence  of  the  mercantile  theory   534,  535 

For  what  purposes  gold  and  silver  are  in  demand    ....     536,  537 

Interest  a  stipulated  rate  of  profit    .       .   538 

Why  silver  should  be  remonetized  539 

Gold  and  silver  being  the  money  of  the  commercial  world,  all  nations 

should  act  in  concert ;  Adam  Smith's  law  of  bank-notes  .  .  .  540 
Deposits  being  regulated,  circulation  is  regulated;  average  price  of 

wheat  541 

Surplus  of  wheat  ought  to  remain  for  a  time  in  first  hands       .       .       .  542 
Practical  remarks  ;  communism  in  France ;  communism  transplanted  ;  to 
their  natural  extent,  unequal  accumulations  of  capital  necessary  to 

human  progress  543 

But  they  are  exaggerated  by  our  monetary  system  ....  543,  544 
The  idea  has  a  political  origin  in  France,  and  a  social  one  in  the  United 

States   544,  545 

The  difference  between  banks  in  Adam  Smith's  time  and  ours  .  .  546,  547 
Bank-note  redemption  in  the  United  States ;  the  actual  relation  between 

bank  reserve  and  bank  debt  in  the  United  States  and  England      .  547 
Smith's  testimony  contradicts  the  opinion  of  writers  in  reference  to  bank- 
notes  547^  548 

Excessive  loans  confined  to  a  few  banks  in  Smith's  time,  but  now  excessive 

loans  are  found  in  nearly  all  banks  349 

All  production  by  the  aid  of  loans  is  on  credit  550 


Ix 


CONTENTS. 


PAOB 

Expansion  of  deposits  in  the  United  States  and  England  .  .  550,  551 
The  rapid  contraction  of  deposits;  what  causes  it  .  .  .  .551,  552 
Apparent  rise  and  real  fall;  what  the  nations  of  the  Anglo-Saxon  family 

require   552,  553 

CHAPTER  XXXI. 

THE    PRESENT    INDUSTRIAL    CONDITION  OF  THE    UNITED    STATES;  PLENTY 
AND  scarcity;  CAPITAL  AND  COMMUNISM. 

The  subject  a  grave  one ;  civilization  and  progress  555 

Commercial  world  in  many  respects  but  one  country  .  .  .  555,  556 
The  ability  of  the  United  States  to  manufacture  for  itself  .  .  .  556,  557 
The  test  of  overproduction  is,  in  an  economical  sense,  surplus        .     557,  558 

The  articles  having  surplus  fall  in  price  559 

Range  of  variation  in  prices;  the  real  contraction  559 

The  crisis  of  1873,  and  its  results   560,  561 

Differences  of  habits  and  manners ;  conversion  of  deposit-loan  banks  into 

banks  of  issue   562-564 

The  condition  of  American  labor  ;  Say's  abstract  law  .  .  .  565,  566 
The  practical  remedy  ;  false  and  misleading  theory  of  money  as  an  active 

cause  567 


Capital  and  communism   568-572 

CHAPTER  XXXII. 

OUGHT  GOVERNMENTS,  OR  BANKS  IN  THEIR  BEHALF,  TO  ISSUE  INCONVERTI- 
BLE CURRENCY  UNDER  ANY  CIRCUMSTANCES  1 

Under  what  conditions  it  may  be  issued  ;  the  stimulus  of  advancing  prices  573 


The  issue  of  such  currency  in  Great  Britain  and  the  United  States  .  573 
Mistaken  policy  of  the  United  States  in  respect  to  its  debt       .       .  574-577 

CHAPTER  XXXIII. 

HOW  BANKING  RESERVE  OUGHT  TO  BE  KEPT. 

The  question  of  legal  property  in  deposits :  what  deposits  are  in  their 

origin  578 

The  effect  of  a  regulated  reserve  upon  outstanding  circulation      .      .  579 

Difference  between  the  objects  to  be  attained  by  a  regulated  reserve  in 

England  and  the  United  States    .       ,   580,  581 

The  maintenance  of  Adam  Smith's  law   581,  582 


INTRODUCTION. 


I  HAVE,  after  mucli  reflection,  been  induced  to  write  and 
publish  this  work,  because  I  believe  that  the  science  of  Po- 
litical Economy,  otherwise  called  Production  and  Exchange, 
has  never  yet  been  put  on  the  proper  foundation  as  to 
money,  and  production  which  puts  money  in  circulation. 

No  science  can  be  said,  in  a  true  sense,  to  be  founded, 
until  the  remote  causes  which  underlie  phenomena  have 
been  unmasked,  as  far  as  human  reason  is  capable.  To 
treat  effects  as  causes  is  not  the  way  to  establish  a  science. 
Some  of  the  phenomena  may  be  and  have  been,  in  this 
manner,  partially  explained,  but  never  satisfactorily  and 
clearly.  Moreover,  the  subject  of  production  and  exchange 
is  by  no  means  simple,  but  vastly  complex.  It  embraces 
the  principal  business  of  civilized  man,  from  the  cradle  to 
the  grave,  in  two  grand  fields :  that  which  furnishes  the 
absolute  necessaries  of  life,  and  that  which  furnishes  those 
which  are  quite  as  necessary  to  maintain  civilization.  It 
has  been  hitherto  asserted  that  there  can  be  no  excess  of 
production  anywhere.  To  prove  that  there  can,  and  that 
the  exchanges,  on  the  harmony  of  which  commerce  and  civ- 
ilization depend,  are  thereby  blocked,  is  one  of  the  objects 
of  this  work.  Another  object  is  to  show  in  what  way,  or 
rather  by  what  cause  or  causes,  the  exchanges  are  blocked ; 
and  herein  lies  the  most  complex  part  of  the  whole  complex 
subject.  The  immediate  or  proximate  cause  is  inability  to 
make  sales  of  overstock,  or,  in  other  words,  to  exchange 
the  commodities  in  overstock  for  commodities  not  in  over- 
stock. This  is,  on  the  face  of  it,  mathematically  impossible. 
The  next  cause  in  order,  above  the  proximate  (overstock) 
1 


2 


INTRODUCTION. 


and  preceding  it,  is  that  which  enables  the  overstock  to  be 
produced.  This  cause  is  complex,  consisting  of  the  credit 
of  the  producer,  which  enables  him  to  borrow  in  order  to 
produce  on  credit ;  the  ability  of  the  lender  to  lend,  or  in 
bank  loans,  more  properly,  as  I  shall  show,  to  guaranty ; 
and  a  rising  scale  of  prices  following  the  continually  in- 
creasing circulation  of  money  through  bank  loans,  which,  up 
to  a  crisis,  gives  the  false  appearance  of  an  active  and  real 
demand  for  consumption.  The  whole  subject  is  thus,  in- 
stead of  being  very  simple,  as  generally  asserted  by  those 
writers  who  only  repeat  what  has  been  written  before,  ex- 
ceedingly complex. 

All  production  by  means  of  loans  is  production  on  credit ; 
and  bank  loans  increase  by  their  volume  that  kind  of  pro- 
duction over  and  above  what  it  would  otherwise  be.  If 
there  were  no  production  on  credit  by  means  of  bank  loans, 
there  could  be  no  sales  on  credit  to  an  extent  sufficient  to 
produce  a  commercial  and  industrial  crisis.  The  labor  di- 
rected to  the  production  of  the  absolute  necessaries  of  life 
never  caused  such  a  crisis.  It  is  the  debt  resulting  from 
loans  made  to  other  producers,  of  whatever  variety  the 
product  may  be,  which  causes  a  crisis. 

Again,  bank  credit  is  said  to  circulate  as  a  substitute  for 
money,  and  checks,  drafts,  and  bills,  and  even  promissory 
notes,  are  said  to  circulate  in  like  manner.  This,  for  want 
of  proper  analysis,  and  in  the  absence  of  it,  seems  to  be 
the  case ;  but  such  is  not  the  case,  otherwise  what  is  called 
convertibility  would  be  but  a  name  and  a  shadow.  Again, 
money  in  the  shape  of  gold  and  silver  coin  or  other  metal 
is  called  an  ordinary  commodity ;  and  the  exchange  of  a 
real  commodity  needed  for  consumption,  for  this  commodity 
money,  the  first  exchange  in  "  doiible  barter:"  but  this  is  an 
utter  fallacy,  arising  in  like  manner  from  the  want  of  rigor- 
ous analysis.  Still  again,  as  a  logical  inference  from  the 
fallacious  premises  that  coin  is  an  ordinary  commodity,  it  is 
supposed  that  if  bank-notes  are  actually  convertible  into  coin 
at  the  will  of  the  holder,  the  grand  object  of  convertibility 
is  attained.    It  is  supposed  that  the  object  of  convertibility 


INTRODUCTION. 


3 


is  the  right  to  convert  and  the  actual  conversion,  when 
desired,  of  a  promise  to  deliver  a  commodity,  into  the  com- 
modity itself.  Therefore  no  matter  how  large  or  how  small 
the  reserve,  provided  the  commodity  is  at  hand  in  sufficient 
amount  to  meet  calls.  This  is  correct  reasoning  from  ut- 
terly fallacious  premises.  Paper  supplies  on  the  average 
exactly  the  place  of  so  much  coin  as  it  displaces  on  the 
average  in  any  given  country,  and  it  adds  to  the  effective 
total  of  coin  throughout  the  commercial  world  as  well  as  to 
that  of  manufactured  metal,  precisely  as  if  it  were  an  equal 
amount  of  gold  or  silver.  It  takes  the  place  and  performs 
the  office  of  so  much  coin  in  point  of  conventional  value, 
and  by  taking  its  place  carries  into  consumption  in  the  arts 
a  corresponding  quantity  of  metal  by  cheapening  it.  More- 
over, as  matter  of  fact,  paper  has  occupied  this  place  for 
generations.  '  It  is  certain  that  convertibility  is  essential ; 
but  it  is  equally  because  thus  demonstrably  certain  that 
the  ordinary  assumption  that  gold  and  silver  coin  are  com- 
modities possessed  of  intrinsic  value  is  not  the  true,  al- 
though it  is  the  imaginary  and  usual  reason  given  for  it. 
The  real  truth  is  that  convertibility  is  essential,  because  the 
metal  into  which  the  paper  is  convertible  furnishes  by  itself 
the  most  stable  currency  in  the  world,  —  the  annual  increase 
to  be  added  to  the  old  supply,  giving  a  ratio  not  in  excess 
of  the  increase  of  commerce,  —  and  because  the  metal  is  scat- 
tered by  commerce  in  its  tracks  throughout  the  commercial 
world. 

Such  being  the  case,  convertibility  as  a  mere  abstract  term 
is  not  sufficient,  but  the  manner  and  the  kind  of  converti- 
bility established  become  important.  It  follows  from  my 
premises,  if  true,  that  a  fixed  minimum  ratio  of  metal  to 
loans  is  essential,  if  the  stability  of  a  metallic  circulation,  or 
rather  one  approximating  it,  is  sought.  Agaiu,  silver  and 
gold  being  in  common  use  as  money  in  the  commercial  world, 
by  units  of  weight,  and  the  product  of  each  metal  varying 
from  time  to  time,  the  variations  have  necessarily  averaged 
each  other  very  nearly  in  point  of  value,  because  diminished 
supply  increases  value  in  proportion ;  and  there  must  have 


4 


INTRODUCTION. 


been  (assuming  both  metals  in  universal  and  equal  use  every- 
where as  money)  an  equal  amount  of  each  coined,  approx- 
imately, —  the  increased  production  of  one  being  attended 
by  loss  in  value  of  its  mass,  and  corresponding  apprecia- 
tion in  the  other.  The  quanti-ties  actually  coined  and  the 
quantities  actually  in  coin  are  conjectural  only ;  and  the 
actual  commerce  carried  on  with  either  metal,  in  point  of 
fact,  has  varied,  and  will  continue  to  vary,  the  amount  and 
value  of  each  metal  in  the  shape  of  coin,  as  one  or  the  other 
metal  is  demonetized  or  monetized,  from  time  to  time. 

Hence  and  for  other  reasons  which  will  appear  in  the 
perusal  of  the  work,  I  call  it  a  new  science  of  production 
and  exchange.  I  do  not  ask  any  man  to  believe  what  is 
affirmed  in  this  introduction  unless  his  reason  is  entirely 
convinced  by  the  demonstrations  following.  All  works 
since  the  days  of  M.  Leon  Say  written  on  this  science  in  the 
main  repeat  their  predecessors.  It  is  time  to  bring  to  bear 
plain  fact  and  rigorous  analysis,  in  order  to  get  rid,  in 
this  most  complex  of  all  sciences,  of  the  fallacies  which 
have  heretofore  passed  for  truth,  because  they  have  not  been 
questioned.  "  Business  "  of  some  kind  is  what  nine  tenths 
of  the  men  in  the  civilized  world  are  engaged  in.  This 
business  is  producing  and  exchanging  by  the  instrumental- 
ity of  money,  applied  to  paying  for  labor  and  commodities. 
If  commodities  were  all  consumed  and  no  more  produced, 
the  use  of  money,  which  is  commonly  called  the  circulation 
of  money,  and  which  is  nothing  but  giving  money  in  ex- 
change for  the  labor  which  first  creates,  and  for  all  the  la- 
bor which  accompanies  the  exchange  of  the  commodities,  — 
the  use  of  money,  I  say,  would  altogether  stop,  because  the 
money,  as  such,  could  not  be  consumed,  like  other  commodi- 
ties. Hence,  because  the  use  of  money  begins  with  the  la- 
bor which  originates  commodities,  and  ends  with  the  ex- 
tinction of  that  labor,  the  expansion  of  labor,  which  is  but 
another  term  for  the  expansion  of  production,  is  the  service 
which  originates  the  use  of  money.  Therefore,  as  production 
expands,  the  use  of  money  expands  with  it.  But  the  only 
object  of  production  is  consumption  ;  and  in  order  to  enable 


INTRODUCTION. 


5 


one  man  to  consume,  lie  must  produce  an  equivalent  to  ex- 
change for  what  he  consumes,  and  on  the  average  he  can  do 
no  more.  So  far  as  he  for  a  time  consumes  more  than  he  ex- 
changes, he  locks  up  the  difference  for  the  time  in  overstock. 
But  he  cannot  consume  at  all  except  by  giving  money  in 
exchange  for  what  he  consumes,  while  he  can  get  money  only 
by  selling  what  he  has  produced.  For  this  his  excess  of 
consumption  over  and  above  his  actual  exchanges,  therefore, 
he  must  borroiv  money.  If  manufacturer  A.  sells  all  the 
woolen  cloth  he  makes  as  fast  as  he  makes  it,  and  if  manu- 
facturer B.  sells  all  the  iron  he  makes  as  fast  as  he  makes  it, 
to  actual  consumers,  the  expansion  of  production  is  balanced 
immediately  by  consumption  ;  and  precisely  to  the  same  ex- 
tent is  the  expansion  of  circulation  (which  is  e:5^)ansion  of 
the  use  of  money)  balanced  by  the  contraction  of  that  use. 
This  contraction  is  the  return  of  an  amount  of  money  to  A., 
who  caused  the  production  to  take  place,  sufficient  to  cover 
the  amount  he  paid  for  all  the  labor  expended  by  himself 
and  others  on  the  commodity.  If  he  used  his  own  money, 
it  is  simply  balancing  the  exchanges  between  production 
and  consumption  in  the  first  and  simplest  form  :  the  produc- 
tion and  consumption  of  commodities  balance  their  exchanges, 
and  the  use  and  retirement  from  use  of  what  may  be  called 
the  substitute  commodity,  money,  balance  their  exchanges 
in  like  manner,  —  not  as  an  active  cause  of  the  exchange  of 
real  commodities,  but  as  the  instrument  by  which  the  active 
cause  works.  But  if  A.  borrowed  the  money  to  pay  for  the 
labor  which  caused  the  production  to  take  place  in  the  first 
instance,  and  B.,  as  a  merchant,  by  loan  purchased  the  prod- 
uct of  him,  he  borrowed  the  money  to  pay  for  all  that  labor 
and  the  labor  which  has  since  accrued  on  the  road  to  mar- 
ket. And  another  result  follows  :  B.  has  stepped  into  A.'s 
shoes  as  a  borrower,  and  increased  the  volume  of  debt  by 
profits  before  the  product  has  reached  market. 

The  circulation  or  use  of  money  has  been  expanded  by  all 
the  labor  accrued  since  the  first  movement  was  made  or 
blow  struck  by  the  workmen ;  and  no  corresponding  con- 
traction has  taken  place  by  selling  the  goods  for  cash  not 


6 


INTRODUCTION. 


borrowed,  to  consumers  who  have  actually  made  exchanges 
and  thus  obtained  the  money. 

The  expansion  of  production  of  commodities  is  thus  ex- 
actly equal  in  this  case  to  the  expansion  of  money  circula- 
tion ;  and  the  contraction  of  production  by  consumption  is 
exactly  equal  to  the  contraction  of  circulation,  by  returning 
the  money  either  to  those  who  put  it  in  circulation,  that  is 
to  say,  to  use,  because  it  was  their  own,  or  to  those  who  lent 
it.  Production  and  consumption  are,  therefore,  the  para- 
mount forces  which  expand  and  contract  the  circulation  of 
money.  But  the  total  of  deposits  is  not  only  equivalent 
but  much  more  than  equivalent  to  an  equal  sum  in  bank- 
notes, because  beside  being  equivalent  it  at  the  same  time 
maintains  a  volume  of  production  equal  to  deposits  minus 
reserve.  Hence  the  common  opinion  that  deposits  arise 
from  sales  of  commodities  is  erroneous.  I  think  I  have 
proved  the  fallacy  of  that  opinion  with  a  certainty  beyond 
reasonable  doubt. 

Deposits  expand  with  production,  and  contract  with  con- 
sumption ;  and  here  we  have  the  recorded  history  in  terms 
of  money,  of  industrial,  commercial,  and  banking  crises. 
Ideas,  that  is  to  say,  current  opinions  about  money,  are  em- 
bodied in  the  terms  Commodity,  Circulation,  Plenty,  Scar- 
city, Bank  Credit,  Bank  Debt,  Reserve,  Bullion  Value,  The 
Exchanges,  Cost  of  labor  as  a  measure  of  values,  etc.  Of 
all  complex  subjects  arising  out  of  the  development  of  hu- 
man society  money  is  one  of  the  most  complex  and  difficult 
to  be  understood  ;  and  the  difficulty  is  increased  by  the 
terms  embodying  old  theories,  which  the  author  of  a  new 
theory  is  still  compelled  to  use,  with  the  best  modifications 
he  can  make,  in  order  to  be  understood  at  all.  This  gives 
rise  to  apparent  prolixity  and  frequently  repetition.  The 
cause  of  the  great  complexity  of  the  subject  is  seven-fold  ; 
1st,  the  unequal  distribution  of  capital ;  2d,  the  unequal  ap- 
plication, as  shown  by  results,  of  productive  force  to  the  pro- 
duction of  absolute  as  compared  with  relative  necessaries ; 
3d,  the  use  of  money  as  a  conventional  commodity  to  ex- 
change for  labor  and  the  commodities  produced  by  labor ; 


INTRODUCTION. 


7 


4th,  the  use  of  money  through  ordinary  loans  in  the  absence 
of  all  banks,  and  with  the  use  of  metals  like  gold  and  silver 
only,  for  the  purpose  of  buying  labor  and  commodities ;  5th, 
the  use  of  convertible  bank-notes ;  6th,  the  use  of  inconver- 
tible paper  money ;  and  7th,  the  introduction  of  deposit  and 
discount  banking.  Deposits  are  a  consolidation  in  one  mass 
of  all  the  money  received  by  one  set  of  depositors  for  the 
results  of  labor  in  the  shape  of  commodities  sold  to  another 
set  of  depositors,  which  causes  money  to  be  paid  out  of  the 
reserves  of  A.,  B.,  C,  and  D.,  consolidated  with  that  of  a 
great  many  others  in  the  grand  consolidated  reserve,  into 
the  reserves  of  E.,  F.,  G.,  and  H.,  forming  another  portion 
of  the  same  grand  consolidated  reserve.  All  these  reserves 
are  in  the  same  bank,  and  all  make  one  mass.  "  Clearing," 
therefore,  is  not  what  makes  the  payments  from  A.,  B.,  C, 
and  D.,  to  E.,  F.,  G.,  and  H.  The  money  goes  out  of  the 
reserves  of  the  former  and  into  the  reserves  of  the  latter, 
quite  as  effectually  as  if  they  were  one  hundred  or  one 
thousand  miles  apart.  The  clearing  and  the  book  entries 
following  clearing  are  only  the  registers  of  the  payments 
actually  made.  When  there  is  no  reserve  in  the  vaults  of  a 
bank,  or  of  some  other  bank  or  treasury  for  its  account, 
banking  is  at  an  end  for  that  bank.  What  really  passes, 
then,  in  all  payments  made  by  banks  for  their  customers  is 
the  money  in  the  reserve. 

The  vast  complexity  of  the  whole  process  has  produced 
the  fallacy  that  a  bank  deals  only  in  debt,  which  is  gen- 
erally^ established  in  the  opinion  of  bankers  and  writers. 
This  fallacy  arises  from  bank  loans.  As  loans  increase 
bank  debt  increases,  because  production,  which  is  variable, 
is  advancing  in  excess  of  consumption,  which  is,  compara- 
tively speaking,  invariable.  This  bank  debt  —  every  dollar 
and  pound  of  it  —  is  a  credit  to  depositors,  and  has  the  same 
power  in  expanding  the  circulation,  which  is  the  use  of  the 
money  in  the  reserve,  by  causing  production  to  take  place 
through  loans,  as  if  precisely  so  much  gold  or  bank-notes 
were  in  the  pockets  of  depositors :  the  total  of  deposits  is  in 
fact,  as  already  stated,  equal  to  a  like  sum  in  bank-notes  in 


8 


INTRODUCTION. 


the  safes  and  pockets  of  depositors,  plus  the  never-to-be- 
forgotten  power  of  maintaining  a  volume  of  production,  in 
the  shape  of  goods,  equal  to  the  total  of  bank  loans.  The 
latter  is  a  continual  expansion  of  circulation,  limited,  not  as 
in  the  case  of  the  money  circulation  of  France,  by  the  ex- 
change of  commodities  through  commerce,  for  actual  con- 
sumption, and  therefore  not  by  the  consumption  of  com- 
modities, but  by  their  production.  The  process  of  what  is 
supposed  to  be  balancing  the  actual  sales  of  commodities 
sold  in  a  consumer's  market,  but  which  is  a  purchase  on 
credit,  in  excess  of  markets,  has  given  rise  to  the  fallacy 
that  a  bank  deals  only  in  debts,  and  to  the  fallacy  that  de- 
posits arise  from  the  sale  of  commodities  instead  of  from 
their  production.  An  increase  of  deposits  is  equivalent  to 
an  increase  of  money,  which  is  not  the  result  of  sales. 
Where  goods  produced  by  the  aid  of  bank  loans  are  sold  to 
merchants  who  buy  by  the  aid  of  bank  loans,  the  debt  to 
the  bank  thus  created  by  the  loan  to  the  merchant,  and  giv- 
ing rise  to  his  bill  or  note,  while  at  the  same  time  it  gives 
rise  to  a  credit  to  his  account  in  bank,  gives  rise  also  to  an 
equal  increase  of  the  total  of  debt  due  depositors  by  the 
bank  over  and  above  reserve.  The  latter  increase  of  debt 
balances  the  debt  due  depositors  created  by  the  first  loan, 
because  the  buyer  by  his  check  in  substance  authorizes  the 
seller  or  the  bank  as  his  agent  to  set  off  or  balance  his  debt 
due  the  bank  on  bill  or  note  by  the  bank  credit  belonging  to 
the  buyer,  so  far  as  that  is  needed  for  the  purpose.  The 
difference  which  covers  profits,  and  which  also  results  from 
the  accumulations  of  labor,  increases  bank  debt,  and  there- 
fore deposits,  to  the  extent  of  the  difference.  This  looks 
like  a  balancing  or  set-off  of  debts,  and  such  it  undoubtedly 
is ;  but  the  set-off  is  only  the  register  of  the  actual  payments 
made  out  of  one  of  the  private  reserves  consolidated  in  bank 
into  another ;  and  when  all  the  money  in  the  consolidated 
reserve  is  insufficient  to  make  the  payments,  banking  stops. 
If  the  clearing  is  the  payment  instead  of  being  merely  a  reg- 
ister of  the  payment,  seventy-five  per  cent,  of  all  the  pay- 
ments outside  of  bank  are  clearings  also.     This  subject 


INTKODUCTION. 


9 


would  be  of  little  practical  use  if  it  had  no  practical  bear- 
ing upon  the  question  of  bank  reserve.  It  is  a  subject  of 
vast  importance,  because  the  debt  theory  leads  to  a  con- 
stantly varying  reserve,  the  money  theory  to  a  ratio  of  re- 
serve varying  as  little  as  possible,  and  to  the  clearing  up  and 
making  plain  to  every  careful  investigator  (for  no  other  can 
arrive  at  the  truth)  of  the  reason  why  the  monetary  system 
of  France  has  maintained  such  a  harmony  of  production. 
The  monetary  systems  of  France,  Great  Britain,  and  the 
United  States  are  examined  in  this  book  from  every  angle 
of  observation  which  the  author  could  obtain.  The  great 
difficulty  to  be  first  overcome  is  the  influence  of  old  theories, 
so  far  as  they  are  crystallized  in  terms  of  money  and  bank- 
ing, which  he  asks  his  readers  to  overcome  to  the  utmost 
extent  possible,  long  enough  to  read  understandingly  what 
he  has  written  on  the  other  side. 

Perhaps  some  further  explanation  of  the  sense  in  which 
new  terms  are  used  and  old  terms  challenged  is  necessary. 
The  use  of  the  term  "ideal "  may  be  thought  objectionable, 
but  it  conveys  the  true  theory  of  money.  The  foundation 
or  origin  of  money  was  in  the  necessities  of  mankind  and 
the  impossibility  of  supplying  them  readily  through  direct 
exchanges  of  commodities  :  an  indirect  mode  was  and  is 
essential  to  supply  the  necessities  of  men  as  and  when  they 
arise.  This  can  only  be  done  by  money  as  a  universal  sub- 
stitute for  one  commodity  in  all  exchanges,  by  implied  or 
express  convention.  The  natural  development  of  the  idea 
of  money  must  have  come  from  a  valuation  of  two  commod- 
ities in  and  by  each  other.  This  valuation  must  be  by  units, 
and  therefore  by  a  simple  ratio  between  the  two,  in  which 
the  units  of  one  commodity  are  compared  with  those  of  the 
other.  Wants  remaining  the  same,  relative  quantities  of 
each  commodity  at  hand  or  within  reach,  and  relative  quan- 
tities of  each  on  hand  at  one  time  as  compared  with  another 
time,  are  the  controlling  causes  which  determine  how  many 
units  of  commodities  shall  go  into  the  numerator,  and  how 
many  into  the  denominator ;  and  this  mental  arithmetic  can 
answer  the  question,  whether  production  is  going  on  in  one 


10 


INTRODUCTION. 


quarter  in  excess  of  another.  Such  a  solution  would  be  un- 
necessary in  rudimentary  society,  but  nevertheless  it  could 
be  accomplished  if  society  could  have  developed  far  enough 
to  require  it  under  such  a  system.  So  long  as  gold  or  sjlver 
was  bartered  in  this  manner,  it  was  on  the  same  footing  with 
all  other  commodities,  for  barter  can  occur  in  no  other  way. 
It  might  be  taken,  it  may  be  said,  at  first  as  a  commodity,  in 
most  exchanges,  by  a  tacit  understanding  that  it  would  be 
received  by  others  from  the  taker.  This  may  have  been, 
and  the  author  will  not  say  that  it  was  not  so,  because  for 
his  purpose  it  is  immaterial.  One  thing  is  certain  :  that  in 
consequence  of  its  universal  adoption,  it  ceased  to  be  a  com- 
modity governed  by  the  ordinary  laws  of  commodity,  and 
became  a  substitute  commodity,  wliicli  is  but  another  name 
for  unit  of  valuation,  purchase,  and  payment.  If  real  com- 
modities, which  are  now  distributed  by  money,  were  not 
needed  for  consumption  to  satisfy  human  wants,  but  only  to 
circulate  from  hand  to  hand,  as  money  does,  they  would  be 
ideal  and  conventional  in  the  same  sense  that  money  is. 
Having  no  utility  but  that  of  circulation  from  hand  to  hand, 
for  the  purpose  of  distribution  and  redistribution,  their 
respective  values  reckoned  in  each  other  would  become  ab- 
stract, and  therefore  ideal  or  supposititious,  in  respect  to 
the  total  quantities  or  units  of  each  actually  existent,  and 
would  depend  upon  the  quantities  of  each  being  at  any  par- 
ticular time  in  circulation.  All  this  may  be  affirmed  of  gold 
and  silver  circulating  as  money.  Its  value  does  not  depend 
upon  the  quantity  or  mass  of  metal  in  existence  alone,  but 
upon  the  total  number  of  units  which  are  being  circulated. 
The  total  quantity  of  units  is  important  only  in  the  sense 
that  it  limits  the  number  which  may  be  put  in  circulation, 
either  more  or  less  efficiently.  If  the  units  of  commodities 
were,  in  the  case  supposed,  distributed  equally  everywhere, 
a  pretty  even  ratio  of  the  circulation  of  the  units  of  all  com- 
modities would  result;  but  if  a  large  number  of  those  of  one 
commodity  could  be  accumulated  in  one  mass,  and  always 
kept  there,  the  circulation  of  the  units  of  that  commodity 
into  and  out  of  the  mass  could  have  no  defined  limits,  and 


INTRODUCTION. 


11 


mathematical  analysis  would  fail,  for  want  of  sufficient  ele- 
ments, to  determine  the  amount  of  abstractly  possible  circu- 
lation.   All  this  has  a  bearing  upon  bank  reserve.^ 

To  return  to  money  as  it  was  or  might  have  been  de- 
veloped, the  idea  of  the  conventional  unit  has  certainly 
followed  the  development  of  money,  either  consciously  or 
unconsciously.  But  it  cannot  have  been  unconsciously  in 
respect  to  mankind,  whether  we  call  it  an  instinct  or  an 
idea.  There  are  abundant  facts  and  an  abundance  of  terms 
which  demonstrate  the  truth  of  this  assertion.  Some  of 
these  facts  are  that  inconvertible  paper  money  has  circulated 
for  long  periods,  is  now  in  circulation,  and  if  it  could,  as  it 
cannot,  furnish  steady  prices  might  continue  to  circulate  in- 
definitely, and  gold  and  silver  be  abandoned.  Why  is  this  ? 
Simply  because  the  relation  between  the  number  of  units 
which  can  be  made  out  of  all  the  gold  in  use  as  money  in 
the  world  is  one  of  numbers ;  divide  it  into  units  of  weight 
as  you  will,  all  the  units  in  each  series  will  still  have  the 
same  abstract  purchasing  power.  Divide  all  the  gold,  half 
into  units  of  ounces,  and  half  into  units  of  pounds,  the  pur- 
chasing power  of  the  unit  ounce  will  be  to  that  of  the 
pound  inversely  as  the  total  number  of  ounces  to  the  num- 
ber of  pounds.  Introduce  silver  or  copper  as  money  with 
gold,  and  the  purchasing  power  of  a  unit  of  the  latter  will 
be  to  that  of  either  of  the  former,  after  sufl&cient  time  has 
elapsed,  inversely  as  the  weights  of  the  respective  masses  of 
each  in  coin.  These  are  some  of  the  facts.  The  practical 
persistence  of  the  idea  is  found  in  the  name  as  well  as  the 
fact  of  token  money,  and  in  the  fact  that  the  bullion  price 
of  silver  in  London  does  not  determine  its  purchasing  power 
as  coin  in  France  or  Germany,  where,  although  coinage  has 

i  It  has  a  bearing  upon  bank  reserve,  because  the  units  of  commodities  going 
into  actual  consumption,  through  commerce,  are  distributed  by  and  therefore 
with  the  units  of  money.  So  long  as  this  distribution  of  money  is  undisturbed 
by  being  massed  in  banks  (that  of  commodities  cannot  be),  it  is  impossible  for 
A.,  B.,  and  C,  or  any  other  capitalists,  to  loan  money  any  faster  than  it  comes  to 
them  through  sales  of  commodities.  But  mass  half  of  all  the  money  in  banks, 
and  it  can  be  loaned  just  as  fast  as  it  comes  back  into  the  bank,  in  exchange 
for  commodities  consumed,  without  any  sale  of  commodities  produced  through 
the  original  loan  having  taken  place. 


12 


INTRODUCTION. 


been  stopped,  it  still  circulates ;  nor  its  purchasing  power 
in  India  or  China,  where  it  still  is  the  sole  "  standard."  It 
will  take  time  for  the  purchasing  power  of  silver  in  India 
and  its  bullion  value  as  shown  in  the  commercial  world's 
market  in  London  to  harmonize.  This  will  take  place  only 
as  the  units  of  metal  capable  of  being  circulated  in  India 
and  China  are  gradually  increased.  If  the  use,  and  there- 
fore the  value,  of  silver  as  money  were  not  wholl}'-  conven- 
tional, and  founded  on  the  idea  of  promoting  exchanges;  in 
short,  if  it  were  used  as  an  ordinary  commodity  like  iron, 
and  for  the  most  part  copper,  the  bullion  price  would  be  the 
measure  of  the  purchasing  power.  What  then  has  arrested 
the  full  development  of  this  fundamental  idea  ?  It  is  the 
fact  that  a  large  amount  of  silver  and  gold  is  consumed  in 
the  manufacture  of  plate  and  in  various  other  modes.  The 
money  value  controls  the  bullion  value  instead  of  the  latter 
controlling  the  former ;  but  because  an  ounce  of  metal  in 
coin  and  an  ounce  in  bullion  are  substantially  equivalents, 
the  fallacy  lurking  in  the  assertion  that  a  gold  coin  minus 
alloy  and  bullion  of  equal  weight  are  one  and  the  same  thing 
is  overlooked,  and  the  whole  case  thus  prejudged.  The  fal- 
lacy lies  in  the  omission  of  the  fact  that  a  very  large  portion 
of  the  value  of  the  metal  as  money,  and  therefore  as  ordinary 
commodity,  is  conventional  and  outside  of  the  coin  itself  and 
in  the  commodities  purchased  by  the  coin,  which  value  would 
be  entirely  lost  by  a  general  demonetization,  and  succeeded 
by  that  value  which  grows  only  out  of  the  intrinsic  qualities 
of  the  metal  itself.  This  fallacy  has  arrested  the  full  prac- 
tical development  of  the  fundamental  idea,  and  the  fallacy 
is  crystallized  in  the  terms  Commodity,  Standard,  Measure 
of  Value,  Bank  Credit,  etc.,  while  proof  abounds,  neverthe- 
less, that  the  terms  are  misapplied.  Gold  cannot  be  a  stand- 
ard by  which  to  measure  values,  like  a  yard-stick  or  half- 
bushel,  because  it  merely  embodies  and  limits  the  units  in 
the  denominator  of  a  ratio;  and  such  units  cannot  be  a 
standard  or  a  measure.  There  can  be  no  standard,  because 
there  is  a  constant  fluctuation  between  the  number  of  units 
in  the  numerator  and  the  number  in  the  denominator.  An 


INTRODUCTION. 


13 


average  within  short  periods,  and  the  most  perfect  average 
attainable,  arises  from  the  use  of  the  units  of  gold  or  silver 
distributed  with  commodities.  There  can  be  no  double 
standard  of  gold  and  silver,  and  no  threefold  standard  of 
gold,  silver,  and  copper,  or  any  other  metal,  because  a  unit 
ounce  of  copper  or  silver  will  be  to  one  of  gold  in  relative 
bullion  value,  under  a  general  monetization  throughout  the 
commercial  world,  inversely  as  the  weights  of  the  respective 
masses  in  coin. 

The  Mercantile  Theory  of  intrinsic  value  in  gold  and  sil- 
ver coin  as  ordinary  commodities,  while  still  retaining  their 
character  of  coin,  has  rendered  it  almost  impossible  to  as- 
certain what  money  really  is.  The  author  of  this  book 
wrote  and  published  a  pamphlet,  in  the  spring  of  1873,  upon 
bank-note  circulation  and  the  necessity  of  a  fixed  ratio  of 
reserve,  and  upon  the  latter  subject  in  the  Banker's  Mag- 
azine," May  and  June  numbers,  1875,  but  could  not  make 
his  argument  clear,  by  reason  of  the  old  fallacy  referred  to. 
It  is  absolutely  impossible  for  any  man  holding  the  commodity 
theory  to  answer  intelligently  the  questions  growing  out  of 
a  well- put  suggestion  of  Mr.  Bonamy  Price :  Why  should 
the  Bank  of  England  keep  so  much  useless  gold,  —  so  much 
more  than  enough  to  supply  all  the  ordinary  calls?  Why 
should  it  not  be  sent  away  where  it  is  wanted,  and  sold  ? 
To  keep  a  commodity  like  copper,  iron,  silver,  or  gold  to 
regulate  banking  is  utterly  incomprehensible.  But  the  au- 
thor of  any  new  theory  about  money  has  a  thankless  task. 
It  is  a  dry  as  well  as  an  incomprehensible  subject  under  the 
commodity  theory ;  and  this  keeps  men  who  might  master 
the  subject  from  reading  and  investigating. 


DEFINITIONS  AND  TERMS. 


There  is  a  want  of  precision  in  tlie  language  of  the  sci- 
ence of  Political  Economy,  which  is  that  of  Production  and 
Exchange.  I  shall  call  it  by  the  latter  title  for  the  most 
part  in  this  work. 

The  cause  lies  in  the  numerous  fallacies  resulting  from 
taking  only  a  surface  or  outside  view  of  the  phenomena, 
without  subjecting  them  to  rigorous  analysis. 

I  call  capital  in  a  general  sense  everything  not  actually 
purchased  or  exchanged  for  consumption.  Money  is  not 
real  capital  but  conventional  capital,  and  is  possessed  there- 
fore only  of  conventional  value.  Nothing  has  value  unless 
it  can  be  put  to  some  use.  Money  can  be  put  to  no  use 
whatever  except  to  exchange  for  all  other  capital  than  itself. 
Hence  its  value,  as  a  matter  of  fact,  lies  only  in  the  things 
for  which  it  can  be  exchanged.  But  this  is  only  another 
form  of  saying  that  money  has  only  conventional  value. 

I  call  a  commodity  any  thing  resulting  from  the  appli- 
cation of  labor,  or  labor  and  capital  aided  by  natural  ele- 
ments and  forces,  to  other  capital,  and  intended  for  con- 
sumption. A  service  arises  also  from  labor,  or  labor  and 
capital,  aided  in  like  manner.  A  commodity  is  a  tangible 
and  real,  a  service  an  intangible  but  real,  result,  important 
in  the  maintenance  of  civilization,  and  hence  of  production, 
as  well  as  of  the  exchanges  which  maintain  the  latter.  At 
the  same  time  services  are  never  overproduced.  I  say  never 
overproduced  because,  although  they  may  give  rise  to  ex- 
cessive unproductive  consumption,  they  are  immediately 
consumed,  or,  in  other  words,  they  leave  no  products  which 
require  a  market  after  they  are  produced. 


DEFINITIONS  AND  TEEMS.  15 

I  call  overproduction  the  production  on  credit  of  a  tangi- 
ble product  which  wants  a  market  and  finds  it  not,  because 
it  is  relatively  in  advance  of  other  production :  the  ex- 
changes upon  which  the  harmony  of  production  depends 
are  thus  blocked,  and  the  result  is  a  commercial  and  indus- 
trial crisis. 

I  call  the  absolute  necessaries  of  life  those  without  which 
life  cannot  be  sustained,  such  as  rude  shelter,  rude  cloth- 
ing, and  food.  In  a  state  of  civilization  the  term  for  all 
practical  purposes  includes  food  for  the  most  part.  I  call  the 
relative  necessaries  of  life  all  necessaries  other  than  those 
before  mentioned. 

I  call  bank  debt  the  total  of  all  debt  due  by  all  the  banks 
in  a  country  to  all  the  depositors  in  that  country  other  than 
banks  plus  the  total  of  bank-notes  issued  by  banks  of  issue, 
minus  all  metallic  banking  reserve  and  all  the  metal  kept 
for  the  redemption  of  bank-notes.  The  total  of  this  bank 
debt  minus  notes  is  a  like  total  of  credit  to  the  account  of 
all  the  depositors  in  the  country,  and  made  up  of  the  total 
of  credits  standing  to  their  several  accounts  minus  the  total 
of  banking  reserve  before  mentioned.  I  affirm  that  bank- 
notes pass  and  are  used  as  money ;  I  deny  that  bank  debt, 
which  is  also  bank  credit,  passes  or  is  used  as  money,  but  as- 
sert, on  the  contrary,  that  banks  pay  out  money  from  the 
reserve  only,  and  receive  money  into  the  reserve  only,  while 
depositors,  through  the  instrumentality  of  checks  or  other- 
wise, order  money  to  be  paid  out  of  the  reserve  only,  which 
is  paid  by  the  banks  accordingly,  while  all  the  money  they 
pay  in  is  paid  into  the  reserve,  —  bank  debt,  the  equivalent 
of  bank  credit,  being  only  the  result  of  unproductive  con- 
sumption occasionally,  and  production  on  credit  chiefly, 
having  no  objective  reality  as  a  substitute  for  money.  The 
money  which  circulates  outside  of  banks  must  necessarily 
be  the  same  kind  of  money  which  is  deposited  in,  paid  out 
from  on  check,  and  loaned  by  banks ;  there  can  be  no  essen- 
tial difference  between  the  two  kinds  of  money.  The  sup- 
posed circulation  or  use  of  bank  debt,  otherwise  called  bank 
credit,  for  the  purpose  of  paying  debts  is  illusory,  because, 


16 


DEFINITIONS  AND  TERMS. 


among  other  reasons,  all  sales  of  goods  produced  on  credit 
by  the  aid  of  bank  loans,  from  producer  to  merchant,  and 
from  one  merchant  to  another  merchant,  by  the  aid  of  bank 
loans,  merely  substitute  one  bank  debtor  or  borrower  for 
another,  adding  to  bank  debt  due  depositors,  over  and  above 
reserve,  the  interest,  profits,  and  charges  which  have  ac- 
crued upon  the  goods  in  the  seller's  hands,  while  all  sales 
for  cash,  and  therefore  for  consumption,  increase  the  re- 
serve, —  all  of  which  will  be  demonstrated  hereafter.  As 
capital  includes  commodity,  money  being  conventional  cap- 
ital is  also  conventional  commodity,  and  bank-notes  con- 
vertible into  gold  are  thus  conventionally  used.  I  call  the 
total  number  of  units  of  metal  found  in  any  country  the 
natural  amount  and  volume  of  money  for  the  country,  re- 
sulting from  commodities  which  have  been  exchanged  for 
consumption,  and  from  money  paid  out  for  labor  and  raw 
material  as  fast  as  commodities  have  been  thus  exchanged, 
and  no  faster.  I  call  convertible  bank-notes  the  equiva- 
lent of  so  many  units  of  metal  produced  and  coined,  and 
the  total  of  bank  debt  used  over  reserve  the  result  and  the 
record  of  so  much  additional  above  the  natural  circulation 
of  money  through  the  instrumentality  of  deposits  and  loans. 
I  call  the  metal  out  of  which  money  is  made  a  commodity. 
Whoever  buys  it  to  work  up  into  money,  plate,  or  jewelry 
buys  it  by  weight,  but  whoever  buys  money  cares  not  for 
weight,  if  he  can  pass  it  for  what  he  has  taken  it  at.  In 
other  words,  money  must  be  coined  in  units  of  weight ;  but 
the  unit  is  alone  thought  of,  and  not  the  weight,  and  a  unit 
of  weight  becomes  a  unit  of  valuation,  purchase,  and  pay- 
ment. Money  is,  therefore,  a  series  of  units  of  valuing, 
purchasing,  and  paying  power,  which  is  but  another  name 
for  commodity  of  conventional  value.  If  money  (e.  g,  sil- 
ver coin)  were  a  commodity  like  wheat,  the  late  demoneti- 
zations which  have  made  silver  bullion  decline  very  largely 
in  London  ought  to  have  made  silver  coin  decline  in  ex- 
changeable value  or,  in  other  words,  purchasing  power  in 
India  and  China  as  well  as  in  France  and  Germany.  But 
this  has  not  been  the  case  yet,  because  silver  coin  is  not 


DEFINITIONS  AND  TERMS. 


17 


an  ordinary  commodity  but  a  conventional  one  ;  and  be- 
cause conventional,  a  unit  of  valuation.  Prices,  therefore, 
will  not  be  seriously  affected  unless,  and  until  gradually 
and  finally,  in  consequence  of  an  increase  of  money  in  those 
countries,  by  reason  of  the  demonetizations,  the  purchasing 
power  of  silver  as  money  is  reduced  until  it  coincides  with 
that  of  its  bullion. 

The  value  of  a  commodity  is  not  the  labor  it  cost  to 
produce  it,  for  such  a  value  is  impossible,  not  only  because 
capital  and  the  elements  and  forces  of  nature  contribute, 
but  because  necessity,  both  absolute  and  relative,  causes  the 
demand  which  is  the  foundation  of  value,  while  limitation 
of  supply  as  it  may  be  greater  raises,  and  as  it  may  be  less 
lowers,  prices.  The  result  is  that  the  wages  of  labor  and 
profits  are  equalized  by  the  natural  tendency  to  equaliza- 
tion. Labor  does  not  determine  values,  but  values  deter- 
mine labor.  I  call  the  apparent  value  of  a  real  commodity 
its  money  price,  and  its  indirect  but  real  value  whatever 
the  money  obtained  for  it  will  procure  of  other  real  com- 
modities. 

I  call  the  conventional  value  of  any  metal  or  other  com- 
modity used  for  the  purposes  of  money  a  value  arising 
from  the  convention  established  by  the  usage  of  a  whole 
or  a  part  of  the  commercial  world,  to  make  use  of  the  units 
of  that  commodity  as  money.  It  is  immaterial  whether  the 
mass  of  the  commodity  be  greater  or  less,  subject  to  the 
proviso  that  the  units  can  be  made  of  suitable  and  con- 
venient size  and  the  mass  sufficient  to  distribute  the  units 
throughout  the  commercial  world  —  weight  or  size  of  the 
unit  determining  its  relative  value. 

The  necessary  and  unavoidable  result  of  this  conventional 
arrangement  is  to  make  the  resulting  units  of  money,  so  far 
as  they  are  used,  the  units  in  the  denominator  of  a  valuing 
ratio  at  every  sale,  the  units  of  goods  in  the  numerator 
determining  and  fixing  for  the  time,  at  each  purchase,  the 
conventional  value  of  the  money  reckoned  in  units  of  goods. 
The  value  of  the  units  of  goods  in  the  numerator  is  deter- 
mined by  the  urgency  of  demand  for  them ;  by  the  quantity 
2 


18 


DEFINITIONS  AND  TERMS. 


in  market  waiting  for  buyers ;  by  the  ability  of  the  owners, 
through  loans  or  otherwise,  to  keep  the  goods  out  of  the 
market,  unless  they  can  obtain  the  price  they  demand  for 
them ;  and  by  the  quantity  of  money,  to  purchase,  in  the 
hands  of  all  buyers.  The  value  of  money  in  exchange,  on 
the  other  hand,  I  affirm  to  be  that  which  results  entirely 
from  the  amount  of  it  actually  exchanged  or  sold  for  com- 
modities. In  other  words,  there  is  no  real  value  in  money, 
because  its  value  is  wholly  conventional.  It  can  have  no 
value,  therefore,  except  when  and  as  it  is  used,  while  the 
value  of  all  real  commodities,  like  wheat,  which  are  actu- 
ally needed  for  consumption,  depends  upon  all  the  elements 
before  mentioned,  and  particularly  upon  the  quantity  on 
hand.  The  quantity  of  wheat  on  hand  largely  controls 
prices  for  the  time  ;  the  quantity  of  money  on  hand  does  not 
control  prices,  but  the  quantity  of  money  paid  out  shows 
what  prices  are,  while  the  quantity  of  money  actually  paid 
out  is  determined  by  the  paramount  forces  of  production 
and  consumption,  —  supply  and  demand,  apparent  profit  in 
overstock,  and  the  ability,  through  loans  or  otherwise,  to 
keep  the  overstock  out  of  the  market.  Hence  I  call  metal- 
lic money  a  conventional  commodity,  which  in  use  becomes 
a  series  of  units  of  valuation,  purchase,  and  payment,  in  the 
several  denominators  of  the  several  ratios  of  price,  limited 
by  the  mass  of  the  material  of  which  the  units  are  made. 
The  units  of  bank  or  government  notes,  standing  in  point  of 
volume  in  definite  ratios  with  the  units  of  metal  distributed 
in  exchange  for  commodities,  labor,  and  capital  throughout 
the  commercial  world,  I  call  units  of  valuing,  purchasing, 
and  paying  power,  having  a  definite  limit  in  the  limitation 
of  metallic  units,  and  possessing  equal  value  with  them,  so 
long  as  they  exchange  for  them  at  par  and  for  an  equal 
number  of  units  of  commodities. 

Where  the  term  Necessaries  is  used  in  this  work,  without 
designating  the  kind,  —  whether  absolute  or  relative, — the 
context  will  show  which  kind  is  meant. 


SOME  OF  THE  NEW  THEORIES  OF  PRODUC- 
TION, EXCHANGE,  AND  MONEY  PRO-  ,  . 
POUNDED  IN  THIS  BOQ^i  ^  -Jv/ 


The  new  theories  propounded  in  this  book  are  :  1.  That 
money  in  the  shape  of  units  of  metal  is  not  a  commodity 
(although  the  material  of  which  they  are  made  is  such)  but 
a  series  of  units  of  valuing,  purchasing,  and  paying  power, 
limited  by  the  material  (commodity)  of  which  they  are 
made.  The  advantages  resulting  from  the  use  of  silver  and 
gold  are,  that,  in  consequence  of  the  long  period  during 
which  their  masses  in  the  shape  of  money  have  been  accu- 
mulating the  ratio  of  average  increase  of  mass  by  new  produc- 
tion is  small,  and  growing  smaller  as  the  mass  increases, 
while  this  tendency  is  counteracted  by  the  large  masses  in 
the  shape  of  manufactured  goods  and  plate,  and  the  ratios 
of  increase  continually  going  on,  and  carrying,  on  general 
average  for  the  past,  probably  as  much  as  thirty-three  and 
one  third  per  cent,  of  each  metal  into  that  use.  The  money 
value  controls  the  bullion  value,  which  for  a  time  may  be  less 
than  that  of  the  money,  while  it  cannot  exceed  it,  and  in 
the  end  exactly  meets  it.  The  cheaper  the  metal  more, 
the  dearer  less  goes  into  manufacture ;  and  thus  the  metallic 
units  of  valuation  maintain  themselves  in  harmony  with 
commerce,  and  thereby  with  production. 

2.  Units  of  bank  and  government  written  promises  to 
pay  metal  are  also  units  of  valuing,  purchasing,  and  paying 
power,  because  the  units  of  metal  are  no  more,  and  they 
are  either  limited  by  the  units  of  metal  absolutely,  approx- 
imately, or  very  imperfectly.  They  are  limited  absolutely 
when  a  government  or  bank  issues  paper,  much  less  in  vol- 


20     NEW  THEORIES  OF  PRODUCTION,  EXCHANGE,  ETC. 


ume  than  the  total  amount  of  money  in  a  country  can  by 
any  possibility  be,  if  distributed  naturally  through  com- 
merce,— -,  .as .  W  case  of  a  limited  issue  of  treasury  notes, 
vahd^  ti^^  T.qif^  ;issued  by  the  Bank  of  England  on  the  security 
of  governmeut  debt,^  were  there  no  deposit  and  discount 
mnkin^  -n  Engl?r;(^.  ;They  are  limited  approximately  under 
a  series  of  banks  of  issue,  whose  notes  are  convertible  on 
deniiand,  ^is  in  Scotland  in  Adam  Smith's  time.  And  they 
have  been  and  are  limited  very  imperfectly  under  deposit 
and  discount  banking,  even  while  convertible,  in  the  United 
States.  All  units  of  metal  distributed  through  a  country  in 
the  absence  of  banks  have  been  distributed  to  the  present 
holders  for  the  most  part  for  goods  sold  for  consumption, 
that  is  to  say  by  commerce  ;  the  like  may  be  said  of  pa- 
per limited  by  a  definite  amount ;  and,  subject  to  some  allow- 
ance, of  paper  approximately  convertible,  but  not  at  all  of 
that  convertible  very  imperfectly.  Paper  not  convertible 
is,  in  the  absence  of  deposit  and  discount  banking,  limited 
only  by  discretion,  but  if  prudently  issued  will  very  fairly 
represent  in  the  hands  of  holders  goods  sold.  Real  redemp- 
tions of  currencies  consist  in  maintenance  of  steady  pur- 
chasing power  and  conversion  into  other  currencies.  Re- 
demption is  substantially  exchange  of  currency,  whether 
metallic  or  paper,  to  meet  the  wants  of  holders  and  main- 
tain purchasing  power. 

3.  The  natural  and  ordinary  use  or  circulation  of  money 
consists  in  its  regular  distribution,  through  commerce,  with 
the  commodities  it  exchanges  ;  and  for  the  purposes  of  such 
distribution  it  may  be  called  a  conventional  commodity,  be- 
cause it  succeeds  through  the  developement  of  society  and 
commerce  to,  and  takes  the  place  of,  one  of  the  two  commodi- 
ties exchanged  through  barter.  Hence  it  is  evidence  in  the 
hands  of  holders  of  so  many  commodities  exchanged  by 
them,  or  others  in  their  behalf,  through  commerce,  for  use 
and  consumption ;  but  as  it  is  also  paid  out  for  labor  and 
raw  material,  it  becomes  also  the  evidence  of  commodities 
produced,  but  not  yet  sold.  As  no  money,  however,  can  be 
used  for  this  purpose  to  any  considerable  extent,  whether 


NEW  THEORIES  OF  PRODUCTION,  EXCHANGE,  ETC.  21 


by  loan  or  otherwise  without  banks,  unless  it  has  first  been 
.received  for  commodities  exchanged  for  consumption,  pro- 
duction on  credit  through  loans  is  balanced  by  consumption 
through  commerce,  within  short  periods,  —  as  in  France  with 
her  circulation  when  chiefly  metallic,  and  substantially  so 
with  her  inconvertible  currency  of  late  years,  which  retired 
her  metal  for  the  most  part. 

4.  All  the  money  in  a  country,  with  all  the  commodities 
in  it,  are  distributed  to  persons,  and  the  average  money  in 
every  man's  hands  may  be  called  his  reserve  of  money,  sup- 
plied by  payments  into  it,  and  exhausted  by  payments  out 
of  it :  units  of  money  come  into  it  in  exchange  for  units  of 
labor  and  commodities  sold,  personally  or  representatively ; 
and  units  of  money  go  out  of  it  in  exchange  for  units  of 
labor  and  commodities  purchased,  personally  or  representa- 
tively. The  supply  of  commodities  comes  through  produc- 
tion by  labor,  and  the  purchase  of  commodities  takes  place 
to  satisfy  natural  and  artificial,  absolute  and  relative,  wants, 
and  because  they  can  be  satisfied  in  no  other  way.  Assum- 
ing these  wants  to  continue  the  same,  prices  of  commodities 
reckoned  in  the  commodities  they  exchange  for,  —  or,  in 
other  words,  the  relative  quantity  of  one  commodity  required 
to  obtain  an  absolute  or  fixed  quantity  of  another  commod- 
ity, —  must  necessarily  depend  upon  the  total  quantity  of 
the  latter  ready  and  waiting  for  exchange  at  the  time,  as 
compared  with  the  quantity  at  another  time,  taking  into 
account  all  the  elements  of  variation,  through  time,  space, 
and  other  incidents  of  like  kind.  The  value  of  one  com- 
modity must  therefore  necessarily  be  reckoned  absolutely 
in  some  other  commodity,  and  relatively  in  all  other  com- 
modities, and  the  variations  in  the  amount  of  its  own  supply. 
There  is  no  such  thing  as  measure  of  values  by  the  amount 
of  labor  the  articles  to  be  valued  have  cost :  the  articles  are 
valued  absolutely  in  each  other,  and  the  variations  in  value — 
wants  remaining  the  same  —  depend  upon  variations  in  the 
quantities  ready  and  waiting  to  be  exchanged,  and  demon- 
strated to  be  thus  ready  and  waiting  by  the  fact  that  they 
are  so  exchanged.    That  commodities  have  at  first  look  the 


22     NEW  THEORIES  OF  PRODUCTION,  EXCHANGE,  ETC. 


appearance  of  being  measured  in  value  by  the  units  of  labor 
they  have  actually  cost,  and  still  more  perfectly  by  the  labor, 
it  would  cost  to  reproduce  them,  is  true,  because  on  the  whole 
and  in  the  long  run  they  cannot,  by  the  very  necessities  of 
the  case,  be  sold  at  less  than  cost.  Production  would  come 
to  an  end,  and  society  itself,  were  it  otherwise  ;  for  all  pro- 
ducers must  live,  and  in  order  that  all  may  live  each  must 
exchange  with  the  other  at  rates  equaling  cost.  That  units 
of  labor  do  not  measure  units  of  commodities  (the  precious 
metals  inclusive)  is  therefore  a  demonstrated  proposition ; 
that  the  labor  which  commodities  cost  is  on  the  whole  paid 
for  by  the  price  they  bring,  reckoned  in  each  other,  is  un- 
doubtedly true,  because  human  necessities  are  the  paramount 
forces  which  cause  it  to  be  true,  as  an  effect  following  the 
cause. 

Production  on  credit,  of  any  kind,  and  keeping  the  prod- 
uce out  of  a  market,  cannot,  under  natural  conditions,  be 
carried  very  far,  because  the  producers  are  forced  to  sell 
from  time  to  time  by  a  natural  necessity ;  but  if  by  any 
artificial  means  it  can  be  and  is  carried  to  an  excess,  —  the 
resulting  crisis  precipitating  all  the  relative  overstock  on 
the  market,  —  the  prices  of  the  overstock  will  not  be  meas- 
ured by  the  labor  it  cost,  but  by  its  quantity  as  compared 
with  the  quantity  of  commodities  not  in  overstock,  for  which 
it  seeks  an  exchange.  The  proposition  I  have  established, 
although  somewhat  general  and  abstract,  is  no  more  so  than 
the  proposition  that  in  the  long  run  labor  measures  the 
values  of  all  commodities  which  it  subverts.  The  fallacy 
lies  in  calling  an  effect  produced  and  controlled  by  a  para- 
mount cause  the  cause  itself.  It  is  a  kind  of  fallacy  which 
prevails  in  the  science  of  Political  Economy,  and  has  ren- 
dered it  impossible  to  establish  any  true  science  in  respect 
to  production,  exchange,  and  the  masterly  power  exercised 
over  them  by  the  use  of  what  I  will  now  call  the  conven- 
tional commodity,  money. 

It  has  led  to  the  fallacy  that  gold  and  silver  in  the  shape 
of  coin  are  commodities  in  the  same  sense  that  gold  and  sil- 
ver in  plate,  wheat,  cloth,  or  iron  are  commodities,  and  so 


NEW  THEOEIES  OF  PRODUCTION,  EXCHANGE,  ETC.  23 


to  the  mercantile  theory  of  "  intrinsic "  vahie  in  gold  or 
silver  coin  as  an  end  in  itself,  and  not  merel}^  means  to  an 
end.  The  most  absurd  results  of  this  theory  were  attacked 
by  Adam  Smith,  but  not  the  theory  itself.  He  believed  in 
the  theory,  because  he  believed  that  labor  is  the  measure  of 
values.  He  mistook  an  effect  for  an  active  cause  ;  he  ex- 
plored the  river  of  distribution  through  commerce ;  he  did 
not  follow  it  up  to  the  source  of  supply  in  production,  and 
the.  forces  behind  production.  If  money  in  the  shape  of 
coin  is  an  ordinary  commodity,  the  end  is  attained  when- 
ever the  commodity  is  obtained,  or  can  at  short  notice  be 
obtained.  Hence,  upon  this  theory,  coin  received  in  ex- 
change for  goods,  and  paper  or  bank  debt  which  can  be 
converted  into  coin  at  short  notice  and  received  in  ex- 
change for  goods,  are  an  end  in  themselves  and  equally 
efficient,  always,  as  respects  steadiness  of  prices,  without 
regard  to  the  circumstances  under  which  they  are  obtained : 
if  they  are  obtained  in  exchange  for  labor  whose  product 
can  be  kept  out  of  market  for  a  long  time  by  means  of 
bank  loans,  it  is  the  same  thing  as  if  they  were  obtained 
in  exchange  for  labor  whose  product  must  soon  be  sold,  or 
for  commodities  which  are  going  immediately  into  consump- 
tion. If  the  mercantile  theory,  that  gold  coin  is  a  com- 
modity worth  what  it  cost  in  labor,  and  is  an  end  in  itself, 
be  true,  there  is  no  danger  from  an  excess  of  it,  and  every 
man  ought  to  get  all  he  can  of  it.  Adam  Smith's  argu- 
ments against  the  mercantile  theory  failed  to  a  great  extent 
because  he  attacked  the  logical  results  of  the  theory  instead 
of  the  theory  itself.  Gold  and  silver  coin  in  their  character 
of  money  cannot  be  ordinary  commodities,  because  the  use 
to  which  a  commodity  can  be  put  in  supplying  a  want  de- 
termines the  mode  of  its  valuation,  while  the  quantity,  in 
the  long  run,  determines  the  limits  of  the  valuation.  If 
wheat  were  used  as  money,  its  price  would  depend  upon 
two  things :  first,  the  quantity  of  it  actually  used  as  money ; 
and,  secondly,  the  quantity  of  it  actually  consumed  as  food. 
There  would  be  a  mutual  and  perpetual  conflict  between 
these  two  valuations  :  the  more  of  it  in  actual  circulation 


24     NEW  THEORIES  OF  PRODUCTION,  EXCHANGE,  ETC. 

as  money,  so  mucli  greater  tlie  values  of  those  commodi- 
ties reckoned  in  it,  and  so  much  less  its  own  exchangeable 
value  reckoned  in  them;  while  the  more  of  it  in  use  as 
food,  the  higher  its  value,  reckoned  in  commodities  other 
than  itself.  The  more  of  it  in  use  as  money,  the  cheaper  it 
would  be  ;  the  more  of  it  used  as  food,  the  dearer  it  would 
be.  But  the  latter  is  for  short  periods  a  steady  use,  and 
increases  in  steady  ratios.  The  variations  in  wheat,  there- 
fore, if  the  production  of  it,  by  the  aid  of  natural  and  human 
forces,  were  steady  (as  that  of  gold  and  silver  are),  would 
depend  entirely  upon  its  varying  use  as  money,  and  the  vari- 
ation would  depend  almost  entirely  upon  the  variation  in 
loans  to  producers,  who  would  employ  it  both  for  circu- 
lation and  consumption.  If  by  any  artificial  contrivance, 
therefore,  the  wheat  could  be  given  an  extra  or  additional 
circulation  through  loans,  over  and  above  its  natural  circu- 
lation in  distributing  commodities  and  supplying  by  labor 
the  void  to  be  filled  by  production,  in  consequence  of  their 
consumption,  this  additional  circulation  would  raise  the  price 
of  other  commodities  reckoned  in  wheat,  and  at  the  same 
time  lower  the  price  of  wheat  reckoned  in  them.  The 
amount  and  the  extent  of  the  use,  then,  are  what  determines 
the  price  or  exchangeable  value  of  gold  and  silver  coin,  as 
well  as  of  all  other  money.  If  its  circulation  is  artificially 
doubled,  there  must  be  in  consequence  a  rise  of  prices.  But 
consumption,  and  therefore  actual  commerce,  cannot  by  any 
possibility  be  doubled ;  it  may  be  stimulated,  but  not  very 
greatly  increased  within  short  periods,  because  limited  by 
surrounding  conditions.  Therefore,  if  the  circulation  of 
money  is  artificially  doubled,  or  even  very  largely  increased, 
it  must  be  caused,  in  the  first  instance,  not  by  the  distribu- 
tion, and  therefore  purchase  of,  commodities,  but  by  their 
production  and  necessary  and  unavoidable  accumulation  in 
overstock.  Circulation,  or  use  of  money,  is  thus  artificially 
maintained  in  excess  of  the  commodities  actually  exchanged 
for  consumption.  Whether  this  can  be  done,  —  if  done,  in 
what  way,  —  will  appear  in  detail  by  reading  the  following 
pages.  The  use  of  money  cannot  be  separated  from  money 
itself. 


NEW  THEOKIES  OF  PRODUCTION,  EXCHANGE,  ETC.  25 


5.  Money  being  circulated,  or,  in  other  words,  distributed, 
in  exchange  for  commodities  to  be  consumed,  and  only  as 
fast  as  they  can  be  consumed,  and  in  exchange  for  the  labor 
to  supply  the  loss  created  in  commodities  by  their  consump- 
tion, no  great  addition  can  be  made  to  the  supplying  volume 
of  production  by  additions  to  the  whole  volume  of  money 
units,  either  by  the  increased  production  of  metallic  mate- 
rial or  by  the  issue  of  paper.  Such  additions,  however,  must 
necessarily  stimulate  the  production  which  is  carried  on  by 
loans,  and  in  fact  all  production.  The  stimulus  was  applied 
slowly,  or  rather  applied  itself  slowly,  after  the  discovery  of 
America,  by  increase  in  metallic  supply.  Production  and, 
to  a  corresponding  degree,  consumption  were  advanced  and 
promoted,  not  because  there  was  a  real  but  an  apparent 
advance  in  the  value  of  commodities.  If  a  man  invests 
his  own  or  borrowed  money  in  production,  while  prices 
are  gradually  rising,  through  the  increasing  volume  of  all 
money  in  all  money  reserves,  he  will,  apparently  to  himself 
and  others,  sell  at  constantly  rising  and  advancing  prices. 
Thereby  up  to  a  certain  point  and  to  a  limited  extent  pro- 
duction will  be  stimulated  ;  but  the  nominal  cost  of  produc- 
tion will  rise  continually,  and  cannot  be  far  behind  prices  of 
the  article  produced,  profits  included.  The  reason  is  that 
the  increased  volume  of  money  is  rapidly  distributed  through 
the  distribution  of  commodities,  and  its  natural  circulation 
is  that  of  the  commodities  themselves.  Production  on  credit 
after  the  expansion  of  money  in  volume  cannot  be  carried 
on  in  excess  of  former  production  on  credit  before  the  ex- 
pansion very  far,  because  money  has  expanded  in  the  hands 
of  those  who  have  received  it  in  exchange  for  commodities 
and  labor :  the  amount  of  money  on  loan,  and  waiting  for 
loan,  has  increased  in  volume,  but  not  in  purchasing  power. 
The  same  amount  of  labor  can  be  paid  for  through  the  in- 
strumentality of  loans,  and  therefore  the  same  amount  of 
production  can  take  place  as  before,  and  no  more.  In  a 
country  developed  like  France  it  would  stimulate  produc- 
tion to  only  a  slight  extent.  The  inconvertible  bank-notes 
issued  within  the  last  seven  years  — 1870-1877,  by  the  Bank 


26     NEW  THEORIES  OF  PRODUCTION,  EXCHANGE,  ETC. 


of  France  —  retired  the  metal  and  convertible  bank-notes 
formerly  in  circulation,  adding  to  the  actual  volume  of  the 
circulation  somewhat  without  increasing  the  "  loanable  capi- 
tal," which  means  the  actual  money  waiting  for  loan,  except 
perhaps  somewhat  as  to  its  volume.  No  more  production 
could  take  place  in  France  than  before.  But  let  such  an 
enormous  volume  of  paper  money  be  issued,  by  banks  or 
governments,  that  the  ability  of  the  banks  or  governments 
to  maintain,  not  convertibility  merely,  but  exchangeable 
value  or  purchasing  power  is  endangered,  it  will  either  de- 
preciate or  be  entirely  discarded,  and  go  out  of  circulation  as 
worthless.  It  will  depreciate  relatively  to  some  other  cur- 
rency (that  of  the  commercial  world),  or  entirely  lose  pur- 
chasing power.  So  long  as  the  chances  in  its  favor  are 
supposed  to  be  on  the  whole  greatest,  it  will  circulate  with 
great  depreciation  as  compared  with  the  money  of  the  com- 
mercial world,  while  its  purchasing  power,  until  it  is  repu- 
diated or  likely  to  be  so,  will  be  governed  by  the  rules 
before  mentioned.  The  currency  issued  by  the  United 
States  in  immense  volume  during  the  late  civil  war  fell 
enormously,  as  reckoned  in  gold,  during  the  war,  —  the  fall 
culminating  at  the  battle  of  Gettysburg,  —  and  rose  rap- 
idly after  the  end  of  the  war.  The  French  assignats  and 
continental  currency  of  the  American  Revolutionary  war 
became  utterly  worthless  by  entire  loss  of  purchasing  power. 
The  maintenance  of  purchasing  power  failed  by  over-issues. 

6.  The  doctrine  of  M.  J.  B.  Say  and  his  followers,  that 
there  can  be  no  overproduction,  is  absolutely  true,  but  rela- 
tively false.  It  is  absolutely  true,  because  there  can  be  no 
overproduction  of  the  absolute  necessaries  of  life :  it  is  rela- 
tively false,  because  there  can  be  and  has  been  an  overpro- 
duction of  the  relative  necessaries  of  life,  measured  by  the 
standard  of  the  absolute.  It  is  absolutely  true,  because  the 
production  of  the  relative  in  excess  of  the  absolute,  which 
limits  it,  can  be  carried  on  only  for  a  tirne,  and  is  stopped 
by  a  crisis  in  the  relative.  The  progress  of  the  relative  is 
not  only  checked,  but  its  producing  power  is  cut  short,  so  as 
to  maintain  an  average^  in  the  long  run,  with  the  absolute, 


NEW  THEOEIES  OF  PRODUCTION,  EXCHANGE,  ETC.  27 


which  limits  and  controls  it.  National  prosperity  is  not  an 
absolute  or  independent  thing,  existing  by  itself  alone,  nor 
is  it  blind  progress  of  production  in  certain  quarters  in  ex- 
cess of  other  quarters.  It  is  the  maintenance  of  population 
in  an  average  state  of  comfort,  proportioned  to  the  advance 
of  civilization,  with  a  progressive  and  equal  advance  in  all 
the  capital  devoted  to  production  everywhere,  and,  subject 
to  this  law,  of  all  the  energy  and  force  possible  applied  to 
production.  There  can  be  greater  or  less  economy  employed 
in  respect  to  the  consumption  of  the  relative  necessaries  of 
life ;  there  can  be  comparatively  slight  variation  in  the 
economy  employed  in  respect  to  absolute  necessaries.  It  is 
asserted  by  some  that  improved  machinery  and  improved 
processes,  by  others  that  tariffs  and  taxes,  are  the  causes  of 
overstock  in  recent  times.  This  is  a  mistake.  All  improve- 
ments in  machinery  which  save  hands  and  accelerate  fin- 
ished product,  and  all  implements  and  processes  which  save 
hands  and  increase  product  of  raw  material,  constitute  pre- 
cisely so  much  human  progress  and  advancement.  They 
merely  demonstrate  that  the  surplus  of  hands  must  be  sent 
away  to  produce  absolute  necessaries ;  they  are  not  the  orig- 
inal cause  of  overproduction.  The  cause  is  relative  over- 
production ;  the  question  is.  What  are  the  conditions  which, 
in  the  first  place,  render  overproduction  possible  at  all  ?  and 
not.  What  are  the  conditions  which  aggravate  it  ?  Neither 
can  taxes  of  any  kind,  tariffs  included,  be  an  original  cause  ; 
they  are  so  much  paid  by  producing  consumers  out  of  real 
or  supposed  profits  or  income  for  the  support  of  the  govern- 
ment and  the  payment  of  its  debts.  The  greater  the  tax, 
the  greater  the  amount  of  unproductive  consumption,  so  far 
as  respects  the  total  fund  which  pays  the  total  tax.  The 
unproductive  consumers  buy  most  of  the  absolute  necessa- 
ries, and  have  so  much  less  money  left  to  buy  the  relative. 
If  they  were  to  become  self-supporting,  because  government 
could  get  on  without  taxes,  probably  one  half  would  go  to 
producing  absolute  necessaries,  and  thus  help  to  restore  the 
balance  in  favor  of  the  absolute  instead  of,  as  before,  helping 
to  turn  it  the  other  way.    To  this  extent,  and  no  more,  do 


28     NEW  THEORIES  OF  PRODUCTION,  EXCHANGE,  ETC. 


taxes  of  all  kinds  —  tariffs  included  —  help  to  bring  on  com- 
mercial crises. 

7.  I  now  come  to  consider  another  subject  treated  in  this 
book,  and  practically  the  most  important  of  all :  the  condi- 
tions which  render  possible  that  excess  or  overproduction  of 
the  relative  necessaries  of  life  which  brings  on  an  industrial 
and  commercial  crisis.  The  forces  actually  in  operation 
behind  money  are  paramount  to  money  itself;  that  is  to 
say,  to  the  circulation  of  money.  Every  merchant  or  man- 
ufacturer who  has  had  a  large  stock  of  goods  which  he  would 
be  glad  to  sell  if  he  could  at  less  than  cost,  and  indeed  at 
any  price  which  would  enable  him  to  pay  his  debts,  knows 
this  to  be  true,  and  that  it  is  not  an  abstract  proposition 
but  plain  matter  of  fact.  Money  is  plenty  enough,  but  pro- 
ducing consumers  will  not  buy,  because  they  are  already 
supplied ;  and  they  have  been  supplied  by  selling  all  they 
had  to  sell.  Had  the  merchant  and  the  manufacturer  fore- 
seen the  overstock  and  the  fall  in  prices,  the  latter  would 
not  have  produced  and  the  former  would  not  have  bought. 
Why  did  they  not  foresee  it?  The  propositions  demon- 
strated already  show  that  as  goods  increase,  while  demand, 
which  practically  means  ability  to  purchase  and  consume, 
remains  the  same,  prices  of  goods  fall.  Therefore,  as  the 
overstock  was  rising,  the  resulting  fall  in  prices  ought  to 
have  demonstrated  loss  immediately,  unless  loss  was  con- 
cealed in  rise  of  price.  But  how  could  prices  rise,  when  no 
additional  issues  of  money  were  going  on  ?  and  how  could 
loans  be  obtained  to  create  the  overstock  ?  Both  these  ele- 
ments are  found  in  deposit  and  discount  banking,  and  they 
are  found  nowhere  else.  Consolidate  one  half  of  all  the 
money  distributed  as  goods  have  been  distributed  in  one  re- 
serve ;  lock  up  seventy-five  or  eighty  per  cent,  of  it  indefi- 
nitely ;  receive  deposits  and  pay  out  deposits  upon  checks, 
and  the  stream  of  incoming  will  average  with  that  of  outgo- 
ing money,  and  there  will  be  the  same  number  of  exchanges 
by  the  payment  and  receipt  of  money  as  before.  Circulation 
outside  of  the  "  reserve  "  will  be  replenished  by  and  will 
itself  replenish  the  reserve.    But  is  this  in  any  sense  a  re- 


NEW  THEORIES  OF  PRODUCTION,  EXCHANGE,  ETC.  29 


serve  ?  Would  it  not  require  a  stretch  of  the  imagination 
to  consider  this  a  reserve  ?  It  all  belongs  to  depositors,  as 
well  as  the  money  locked  up.  But  now  suppose  the  custo- 
dians or  bankers  of  this  consolidated  reserve  to  unlock  the 
money  which  is  not  in  the  "  reserve,"  and  loan  it  gradually. 
The  money  goes  into  circulation,  and  as  it  does  so,  gives  rise 
to  bank  loans,  and  we  have  a  bank  with  a  modern  reserve, 
which  it  supposes  to  be  its  own  because  it  has  borrowed  it 
from  the  depositors.  But  the  metal  and  bank-notes  loaned 
departed  because  they  were  in  excess  ;  yet  the  "  reserve  "  is 
just  as  able  to  effect  all  the  exchanges  of  depositors  as  it  was 
before.  A  vast  change,  however,  has  resulted.  What  is  it  ? 
The  "  reserve  "  was  fully  equal  to  all  the  calls  made  upon 
it  before  any  loans  took  place,  but  it  was  also  equal  to  much 
more.  It  could  be  reduced  just  so  long  and  just  so  far  as 
would  consist  with  the  maintenance  of  the  ingoing  and 
outgoing  streams ;  and  the  two  streams  could  have  been 
enlarged  in  volume,  and  the  reserve  at  the  same  time  much 
reduced,  before  any  loans  were  made  at  all.  It  is  precisely  so 
now  after  the  loans  are  made,  although  there  is  nothing  to 
show  for  the  metal  and  notes  which  have  departed  from  the 
open  treasury  but  an  equal  amount  in  bank  debt  due  depos- 
itors, over  and  above  reserve.  What  has  the  departed  money 
accomplished  before  it  took  its  flight?  It  has  caused  an 
equal  amount  of  production  on  credit  through  bank  loans. 
The  money  could  be  used  for  no  other  purpose,  because  the 
"  reserve  "  was  and  still  is  equal  to  making  all  exchanges 
through  the  outgoing  and  incoming  streams.  But  the  de- 
parted money  left  behind  it,  and  in  its  place,  a  power  equal 
to  itself  in  volume,  brought  into  existence  by  production  on 
credit,  increasing  in  volume  with  it,  and  equal  —  every  dol- 
lar or  pound  in  it  —  to  every  dollar  in  metal  and  notes 
loaned.  The  latter  departed,  because  the  possible  expansion 
of  the  circulation  or  use  of  the  money  in  the  reserve,  by  the 
aid  of  the  resulting  bank  debt,  operating  like  a  power  or 
series  of  powers  in  the  hands  of  depositors,  by  the  instru- 
mentality of  checks,  was  fully  equal  to  the  possible  circula- 
tion of  metal  and  notes  when  all  the  money  was  in  the 


30     NEW  THEORIES  OF  PRODUCTION,  EXCHANGE,  ETC. 


hands  of  depositors.  The  actual  expansion  which  took 
place  by  loaning  the  metal  and  notes  from  time  to  time 
resulted  in  an  equal  amount  of  production  on  credit,  and  an 
equal  amount  of  debt  due  the  bank,  but  made  no  change  in 
its  debt  due  depositors.  This  power  to  use  the  reserve  was 
and  is  precisely  equal  to  all  the  possible  circulation  which 
could  be  accomplished  by  the  departing  metal  and  notes. 
The  latter  departed,  because  they  were  superfluous;  they 
were  superfluous,  because  their  issue  as  it  proceeded  left  a 
substitute  in  their  place  previously  existing,  —  a  power  to 
work  the  reserve,  so  to  speak,  in  such  a  manner  (by  the  in- 
strumentality of  checks)  that  the  metallic  pieces  and  the 
bank-notes  in  the  reserve  equaled  in  efficiency  all  the 
money  before  it  was  deposited.  But  one  inexorable  condi- 
tion attended  the  loan  of  the  metal  and  notes,  in  addition 
to  the  creation  of  this  equivalent  power.  That  condition 
was  the  purchase  with  the  metal  and  notes  of  an  equal 
amount  of  labor,  or,  what  is  the  same  thing,  commodities 
which  cost  labor.  The  purchase  of  commodities  had  pre- 
cisely the  same  effect  as  the  purchase  of  labor,  because  it 
enabled  the  buyers  to  buy  on  credit.  I  say  on  credit,  not 
merely  because  they  borrowed  the  mone}^,  but  because  they 
borrowed  it  in  excess  of  all  the  exchanges  of  commodities, 
and  therefore  of  money,  which  had  up  to  that  time  taken 
place.  It  was  giving  the  money  a  circulation  on  credit,  be- 
cause it  was  in  excess  of  all  the  exchanges  the  money  had 
previously  accomplished,  when,  as  already  shown,  the  nat- 
ural use  of  money  as  a  conventional  commodity,  which  is 
but  another  name  for  unit  of  valuation,  purchase,  and  pay- 
ment, consists  in  exchanging  it  for  commodities,  and  labor 
to  produce  commodities,  as  fast  as  consumed.  It  is  the  nat- 
ural use,  because  it  naturally  arises  if  money  is  left  to  itself, 
inasmuch  as  money  follows  commodities.  By  the  natural 
use  of  money  there  can  be  no  excessive  production,  any  more 
than  under  a  state  of  barter,  because,  under  either,  produc- 
tion on  credit  is  very  limited.  But  the  introduction  of  de- 
posit and  discount  banks  has  so  complicated  the  subject  of 
money  that  it  is  the  most  complex  of  all  the  problems  of 


NEW  THEORIES  OF  PRODUCTION,  EXCHANGE,  ETC.  31 


the  time,  while  it  has  a  more  important  bearing  than  any- 
other  upon  the  comfort  and  happiness  of  men.  Deposits  do 
not  create  any  inflation  "  of  the  currency,  as  sometimes 
supposed,  because  they  increase  in  exact  proportion  to  the 
production  of  goods,  and  no  faster.  A  dollar  or  pound  in 
goods  appears  for  every  dollar  or  pound  in  deposits ;  an  in- 
flation of  currency  appears  in  an  issue  of  money  which  is 
in  excess  of  goods.  But  the  expansion  of  deposits  raises 
prices,  although  commodities  increase  at  the  same  rate,  be- 
cause loans  enable  producers  to  keep  their  stocks  out  of 
market ;  and  this,  until  the  overstock  is  so  great  as  to  bring 
on  a  crisis,  enables  them  to  sell  at  a  profit.  If  bank  loans 
were  made  only  to  manufacturers,  merchants  would  have 
little  overstock,  comparatively ;  the  overstock  would  be  left 
in  first  hands,  and  sales  for  cash,  to  distribute  to  actual 
consumers,  could  alone  reimburse  the  manufacturers  and 
enable  them  to  produce  again.  It  is  the  purchases  by  mer- 
chants which  cause  no  actual  exchanges  of  commodities  to 
take  place,  that  carry  up  and  maintain  the  prices  of  the 
overstock.  This  is  buying  on  credit,  undoubtedly,  even  if 
gold  eagles  and  sovereigns  are  handed  over,  because  no  act- 
ual exchanges  of  commodities  take  place. 

8.  The  next  and  the  great  and  important  matter,  prac- 
tically, is  the  remedy  for  all  this.  Gold  and  silver  furnish 
the  steadiest  circulation  possible  —  I  had  almost  said  con- 
ceivable. If  harmony  of  production,  with  as  little  loss  of 
energy  as  possible,  the  most  even  distribution  and  the  great- 
est accumulation  of  wealth  possible,  with  steady  wages  and 
profits  and  a  minimum  of  bankruptcies,  be  on  the  whole 
and  in  the  long  run  desirable,  then  a  metallic  currency, 
without  banks  of  any  kind,  with  banks  of  issue  well  regu- 
lated, or  with  banks  of  issue,  deposit,  and  discount  having 
a  reserve  artificially  maintained  in  nearly  as  even  ratio  as 
possible  with  the  total  of  bank  debt  over  bank  credit,  in 
every  bank,  is  desirable  also  as  the  condition  precedent. 
The  object  to  be  attained  by  such  a  reserve  will  be  fully 
and  in  various  forms  shown  in  the  following  chapters. 

Sufiice  it  to  say  now,  that  by  keeping  a  fixed  ratio  of 


32     NEW  THEORIES  OF  PRODUCTION,  EXCHANGE,  ETC. 


reserve  we  accomplish  the  same  object  as  would  have  been 
accomplished  when  bank  loans  were  inaugurated  in  the  case 
assumed,  by  stopping  the  loans  of  depositors'  money  after  it 
had  run  down  to  twenty  per  cent,  of  its  total,  and  abso- 
lutely refusing  to  make  any  loans  when  it  had  reached  that 
point,  and  waiting  until  it  began  to  increase  before  making 
any  more  loans.  This  is  to  limit  production,  when  it  has 
reached  eighty  per  cent,  of  total  deposits,  thenceforth  by 
actual  commerce,  —  that  is  to  say,  by  consumption.  The 
practical  problem,  how  it  can  be  done,  is  given  hereafter. 

There  are  other  new  but  subordinate  propositions  main- 
tained in  this  book,  but  I  have  given  the  principal  and  im- 
portant ones,  on  which  the  others  hinge,  and  I  would  not 
now  break  the  force  of  the  former  by  contrasting  them  with 
the  latter. 


POLITICAL  ECONOMY. 


CHAPTER  1. 

DEVELOPMENT  OF  MONEY  AND  ITS  USES.  ' 

The  question  may  be  asked,  Why  place  the  subject  of 
money  in  the  first  chapter  of  a  book  written  upon  Political 
Economy  ?  The  answer  is,  because  Political  Economy  is 
the  science  of  Production  and  Exchange,  and  the  inven- 
tion of  money  is  the  first  step  towards  making  exchanges, 
without  which  there  could  be  no  progress  in  production  it- 
self. 

Money  was  invented,  it  is  commonly  supposed,  to  measure 
the  value  of  things  produced  and  ready  to  be  sold.  This 
assertion  is .  absolutely  true,  but  relatively  false  :  it  is  abso- 
lutely true  because  that  is  one  of  the  objects  for  which 
money  was  invented,  and,  according  to  Montesquieu,  the  only 
object  attained  by  the  money  of  a  certain  African  tribe, — 
ideal  units  called  Macoutes.  This  money  did  not  supersede 
barter,  but  enabled  barter  to  take  place  with  more  facility. 
Barter  is  the  exchange  of  one  article  or  commodity  for  an- 
other; and  it  was  facilitated  in  this  tribe  by  the  use  of  the 
units  called  macoutes.  If  one  commodity  were  valued  at  two 
macoutes,  the  other  might  be  valued  at  three  or  perhaps  four 
macoutes.  Whether  such  a  tribe  and  such  a  mode  of  valua- 
tion ever  existed,  I  am  unable  to  say,  but  certain  it  is  that 
Montesquieu  has  here  given  us  the  money  of  civilized  men  in 
its  first  stage  of  natural  development.  It  is  commonly  sup- 
posed and  asserted  by  writers,  that  money  is  the  measure  of 
value,  as  a  yard-stick  is  of  cloth.  This  is  true,  but  if  it  con- 
tains the  whole  truth  in  respect  to  money,  we  are  still  in  the 
3 


34 


POLITICAL  ECONOMY. 


condition  of  this  African  tribe.  The  macoute  was  an  imagin- 
ary unit,  by  which  the  relative  values  of  two  commodities, 
brought  together  by  two  parties  to  be  exchanged,  were  deter- 
mined. The  yard-stick  measures  length  and  breadth,  and  thus 
furnishes  a  unit  of  length,  a  unit  of  breadth,  and  a  resulting 
unit  of  surface,  which  is  actual  and  visible.  The  macoute, 
or  unit  of  valuation,  is  neither  actual  nor  visible,  because  it  is 
entirely  abstract  and  ideal,  like  all  units.  It  is  a  method 
of  measuring  the  value  of  one  commodity  by  comparing  it 
with  another,  through  the  instrumentality  of  an  abstract 
unit  which  has  neither  length  nor  breadth. 

It  is  impossible  to  separate  the  macoutes  from  their  use  : 
their  use  is  the  measuring  of  two  values  by  means  of  a  ratio, 
and  a  ratio  is  necessarily  abstract.  One  thing  is  certainly 
true  of  these  macoutes :  they  are  units  of  valuation,  and 
therefore  may  be  said  to  measure  values  of  commodities. 
Another  thing  is  equally  certain  :  that  abstractly  there  is  no 
limit  to  the  units  in  a  ratio.  How,  then,  can  the  macoute 
be  said  to  measure  values  ?  Can  it  by  any  possibility  be 
said  to  be  a  measure,  if  it  has  no  assignable  limits  ?  Surely 
not.  But  has  it  no  limits  ?  Surely  it  has,  because  it  is 
limited  by  the  commodities  actually  exchanged.  This  is  the 
analogy,  and  the  only  analogy,  between  the  macoute  or  money 
unit,  the  yard-stick,  which  measures  surface,  and  the  pound, 
which  measures  weight.  Here  lies  the  true  germ  of  all 
money.  Now  let  us  take  one  step  more  in  the  process  of 
development.  The  first  step  is  barter,  and  the  commod- 
ities are  exchanged  by  means  of  an  ideal  unit,  which,  al- 
though it  has  no  local  habitation,  has  a  name,  which  is, 
macoute.  The  name,  however,  is  not  essential :  if  one  com- 
modity be  counted  2,  the  other  may  be  counted  3  or  4. 
The  second  step  is  to  dispense  with  one  of  the  commodities, 
and  give,  not  only  a  name,  but  a  local  habitation  to  the  ideal 
unit  called  macoute.  Let  us  suppose  that  after  various 
commodities  have  been  adopted  and  superseded  by  the  ad- 
vance of  society  silver  is  introduced.  Now  how  can  silver 
be  used  as  a  commodity  of  universal  exchange  ?  It  is  abso- 
lutely, I  had  almost  said  mathematically,  certain  that  it  can 


DEVELOPMENT  OF  MONEY  AND  ITS  USES. 


35 


only  be  used  as  a  unit  of  valuation  like  the  macoute,  with 
this  qualification,  —  that  the  ideal  unit  called  macoute  was 
limited  by  commodities  actually  exchanged  for  each  other  ; 
the  same  unit,  embodied  in  silver,  is  now  limited,  not  by 
commodities  actually  exchanged  for  consumption,  but  by  the 
number  of  units  of  any  given  weight  which  can  be  made  out 
of  all  the  commodity  called  silver  which  can  be  obtained 
now  and  in  the  future.  But  says  a  theorist,  who,  although 
he  assumes  to  be  a  disbeliever  in  the  Mercantile  Theory  of 
gold  and  silver  coin  as  being  an  end  in  itself,  and  not  merely 
means  to  an  end,  still  clings  to  the  theories  of  Adam  Smith 
and  others,  that  gold  as  well  as  silver  coin  is  a  commodity, 
which  is  still  exchanged  in  its  character  of  a  commodity,  and 
therefore  bartered  for  all  other  commodities;  being  meas- 
ured in  value  as  a  commodity  by  the  labor  required  to  mine, 
smelt,  alloy,  and  manufacture  it :  How  can  silver  coin  be  a 
mere  unit  when  its  value  as  coin  differs  so  little  from  its  value 
as  bullion  ?  The  latter  assertion,  I  reply,  although  true  in 
one  aspect,  is  false  in  another,  as  I  will  shortly  demonstrate. 
The  number  of  silver  units  possible,  as  I  have  already 
stated,  is  limited  by  the  material  out  of  which  they  can  be 
manufactured.  This  material  is  a  commodity,  but  the  units 
which  can  be  manufactured  are,  in  their  character  of  units, 
certainly  not  a  commodity.  Some  weight  must  be  given  to 
the  unit.  If  one  nation  adopts  a  pound,  another  may  adopt 
a  half,  a  quarter,  or  an  eighth  of  a  pound,  an  ounce,  or  even 
a  pennyweight,  as  the  unit  of  weight,  again  subdividing  the 
principal  unit,  or  not  subdividing  it,  as  it  may  choose.  If  one 
nation  adopts  a  pound,  and  another  a  half  pound,  as  the  unit 
of  weight  for  its  coin,  it  is  mathematically  certain  that  the 
purchasing  power  or  value  in  exchange  of  the  latter  must  in 
the  abstract  be  to  the  former  as  the  weights ;  that  is  to  say, 
directly,  or  as  one  to  two.  Valuation  of  all  sorts,  there- 
fore, by  way  of  the  process  or  invention  called  money,  must 
necessarily  be  by  way  of  abstract  or  ideal  units,  limited  in 
one  of  the  two  modes :  1st,  by  commodities,  as  in  the  case 
of  the  macoutes ;  and  2dly,  by  the  number  of  units  which 
can  be  furnished  by  any  commodity  universally  agreed  upon 


36 


POLITICAL  ECONOMY. 


for  that  purpose.  From  these  two  modes  of  limiting  the 
number  of  units  of  money  has  been  developed  in  modern 
times  a  third,  which  is  a  promise  localized  on  paper  to 
deliver  the  units  of  metal  before  mentioned  and  token  or 
subsidiary  coins  for  small  exchanges. 

The  latter  two  are  not  limited  by  the  number  of  commod- 
ities actually  exchanged  for  each  other,  as  in  the  case  of  the 
macoutes ;  nor  are  they  limited  by  the  amount  or  quantity  of 
the  commodity  or  material,  as  in  the  case  of  units  of  metal 
of  any  given  weight  coined  by  governments  for  individuals, 
or  weighed  out  as  units  in  the  absence  of  such  coinage,  by 
individuals,  as  in  the  early  instance  recorded  in  the  Old  Tes- 
tament, when  Abraham  weighed  out  the  shekels,  and  de- 
livered them  in  payment  for  a  burial-place.  Paper  promises 
to  deliver  units  of  metal  of  a  given  weight  are  not,  in  the 
second  place,  limited,  like  the  macoutes,  by  commodities 
actually  exchanged,  because  there  is  but  one  commodity 
present  to  be  exchanged,  and  that  commodity  is  exchanged 
for  the  paper.  Hence  it  follows  that  inasmuch  as  paper 
and  promises  which  can  be  made  on  paper  are  practically 
unlimited  they  must  be  artificially  limited,  not  only  by 
the  solvency  of  the  issuers,  but  by  the  number  of  units  of 
metal  which  have  been  manufactured  out  of  the  metal 
into  which  they  are  convertible.  To  make  this  proposi- 
tion clear,  I  affirm  that  when  barter  is  by  the  develop- 
ment of  society  cast  aside,  and  the  unit,  which  we  will  call  a 
macoute,  and  which  has  no  existence  but  in  name,  develops 
into  a  unit,  having  not  only  a  name  but  a  local  habitation 
in  a  unit  called  money,  and  therefore  a  necessary  limitation 
in  and  by  the  number  of  units  which  can  be  made  out  of  the 
material  used  to  manufacture  or  even  simply  to  weigh  out 
the  unit  of  money,  the  further  development  of  the  paper 
unit  of  bank  or  government  debt,  in  the  shape  of  paper  prom- 
ises to  pay  and  deliver  on  demand  units  of  metal  by  weight, 
ought  to  be  limited  by  the  total  number  of  units  of  metal  ex- 
isting in  the  shape  of  coin  throughout  the  commercial  world. 
Now  it  is  a  conceded  point,  that  there  must  be  what  is 
called  a  metallic  reserve  to  insure  such  convertibility ;  but 


DEVELOPMENT  OF  MONEY  AND  ITS  USES.  37 


it  is  asserted  by  all  writers  that  this  reserve  may  vary  con- 
tinually. This  assertion  is  the  logical  result  of  the  mercan- 
tile theory  of  gold  and  silver  coin  being  an  end  in  itself, 
and  a  commodity  possessed  of  "intrinsic  value."  Adam 
Smith  attacked  successfully  some  of  the  abuses  or  results  of 
this  theory ;  he  never  attacked  the  theory,  because  he  be- 
lieved in  it  himself,  as  did  also  M.  J.  B.  Say.  Both  believed 
gold  and  silver  coin  to  be  a  commodity  possessed  of  intrinsic 
value,  measured  by  the  labor  it  costs  to  place  it  in  the  shape 
of  bullion  in  the  market.  This  theory  is  false  in  reference 
to  any  commodity,  as  I  shall  show  in  the  course  of  this 
work,  and  I  will  shortly  demonstrate  its  falsity  in  respect  to 
gold  and  silver  coin. 

If  metallic  money  is  limited  by  the  number  of  metallic 
units  in  existence,  paper  money,  having  a  reserve  of  metal 
behind  it,  should  therefore  be  limited  in  like  manner  ;  other- 
wise it  cannot  be  limited  at  all,  because  it  cannot  be  limited 
by  commodities  actually  exchanged. 

Hence  it  follows  that  the  doctrine  of  those  who  assert  that 
"  convertibility "  alone  is  sufficient  is  false.  They  found 
their  opinion  on  the  mercantile  theory  of  gold  and  silver  coin 
as  a  commodity  having  intrinsic  value  in  itself,  and  being 
therefore  an  end  in  itself,  instead  of  being,  as  it  really  is,  only 
means  to  an  end.  Because  metallic  money  is  not  a  commod- 
ity, but  a  process  and  a  series  of  units,  having  its  limitation 
in  the  quantity  of  material  out  of  which  the  units  can  be 
made,  —  exchangeable  value  or  purchasing  power  being  there- 
fore inversely  as  the  number  of  units  paid  out  for  a  given 
number  of  units  of  commodities,  —  having  as  money  no  in- 
trinsic value  in  itself,  but  extrinsic  value  in  the  things  it  uni- 
versally exchanges  for,  it  follows  that  a  paper  currency,  in 
order  to  be  limited  like  a  gold  and  silver  one  (or,  in  the  words 
of  those  who  were  the  founders  of  the  Bank  of  England  as 
modified  by  the  act  of  1844,  in  order  to  vary  as  gold  varies), 
must  have  a  definite  amount  of  metal  behind  it :  the  amount 
of  paper  must  be  in  a  definite  proportion  to  that  metal.  But 
has  not  the  paper  of  the  Bank  of  England  a  definite  pro- 
portion of  gold  behind  it  ?    Surely  it  has.    Does  not  the 


88 


POLITICAL  ECONOMY. 


paper,  then,  vary  as  gold  varies  ?    Surely  it  does,  and  must 
necessarily  do  so.    Has  it  then  accomplished  the  object  of 
its  founders  ?    This  question  cannot  be  answered,  because 
it  cannot  be  known  what  their  object  was,  further  than  their 
•words  imply.    But  has  the  paper  of  the  Bank  of  England 
been  limited  by  the  number  of  units  which  the  metal  gold 
can  furnish  ?    Surely  it  has.    But  has  the  bank  failed  to  ac- 
complish the  object  desired  in  any  particular?   It  surely  has  ; 
because  the  government  has  been  compelled  in  the  midst  of 
a  commercial  crisis  to  abandon  the  principle  upon  which  the 
bank  was  founded.    What  was  the  cause  ?  To  understand  the 
cause,  another  step  in  the  development  of  this  now  most  com- 
plex process  of  money  must  be  examined ;  and  I  have  referred 
to  the  Bank  of  England  only  for  the  purpose  of  illustrating 
this  development.    The  units  of  metallic  money,  having  a 
local  habitation  as  well  as  a  name  in  metallic  coin,  and  being 
limited  in  number  by  the  quantity  which  the  commodity  or 
material  of  gold  and  silver  (it  is  immaterial  which  of  these 
latter  two  terms  we  use)  can  furnish,  and  being  paid  out  or 
exchanged  for  labor  and  raw  material  and  other  commodities, 
are  necessarily  and  naturally  distributed  throughout  the  com- 
mercial world,  because  the  commercial  world's  money.  How 
are  they  distributed  ?    By  commerce,  I  answer,  because  they 
can  be  distributed  in  no  other  manner,  and  by  no  other 
means.    But  commerce  is  the  distribution  of  commodities  by 
means  of  exchange,  with  a  value  added  to  the  commodities 
by  means  of  the  distribution.    The  distributor  or  merchant 
is  in  this  sense,  and  in  no  other,  a  producer,  because  he  pro- 
duces and  adds  to  the  commodities  exchanged  an  additional 
value  by  reason  of  the  labor  and  capital  required  to  make 
the  exchange  :  he  is  not  the  first  producer  who  originates  the 
commodity.    Gold  and  silver  coin  are  therefore  distributed 
as  commodities  are  distributed,  and  those  who  distribute  the 
most  have  the  most  money.    Such  being  the  natural  distri- 
bution of  money  in  the  shape  of  metallic  coin  in  harmony 
with  commerce,  it  follows  that  any  other  distribution  of  it 
must  necessarily  be  either  in  excess  or  defect  of  commerce. 
But  the  distribution  cannot  by  any  possibility  be  in  defect  of 


DEVELOPMENT  OF  MONEY  AND  ITS  USES.  39 


commerce,  that  is  to  say  short  of  actual  commerce,  because 
commerce  distributes  commodities,  and  the  exchanges  are  all 
made  by  money.  Therefore  any  other  than  the  natural  dis- 
tribution of  money  must  be  a  distribution  in  excess  of  actual 
commerce.  Money  is  distributed  to-day  in  France  by  actual 
commerce;  but  establish  a  bank  of  deposit  in  Paris  to-mor- 
row, of  one  thousand  millions  of  francs,  and  let  the  money 
be  paid  out  by  the  instrumentality  of  checks.  A  part  of  this 
money  will  answer  actual  calls,  and  the  remainder  may  be 
locked  up  for  years.  Now  open  the  vaults  and  let  the  man- 
agers loan  all  the  money  they  choose,  subject  to  the  condition 
of  answering  all  calls  by  check.  This  money  will  not  be  dis- 
tributed by  commerce,  but  by  production ;  not  according  to 
the  actual  distribution  of  commodities  as  before,  but  accord- 
ing to  the  actual  production  of  commodities.  Introduce  this 
system  throughout  France,  and  place  no  limit  below  which 
the  "  reserve  "  shall  be  allowed  to  fall,  and  there  is  no  assign- 
able limit  to  the  number  of  units  which  can  be  put  in  circu- 
lation but  the  limit  of  possible  production  throug^h  payments 
made  for  labor  and  raw  material. 

This  production  I  call,  in  the  following  pages.  Production 
on  Credit,  in  advance  of  actual  commerce.  Production  by 
means  of  a  loan,  at  any  time  or  under  any  circumstances,  is 
production  on  credit ;  but  where  money  is  distributed  entirely 
by  commerce  it  is  production  warranted  by  a  distribution 
already  made  for  the  purposes  of  consumption. 

Because  this  system  prevails  in  England  is  the  reason  why 
the  Bank  of  England  has  failed.  Hence  it  follows  that  the 
only  check  to  the  causes  which  have  produced  the  failure  is 
to  fix  a  definite  point  below  which  what  is  called  bank  re- 
serve shall  not  go.  The  meaning  of  this  language,  in  other 
words,  is,  to  fix  a  definite  point  by  means  of  a  definite  ratio 
of  reserve,  when  and  where  all  further  loans  to  producers 
shall  stop ;  thenceforth  limiting  production  by  actual  sales 
for  consumption. 

Now  all  this  is  unintelligible  upon  the  mercantile  theory 
of  intrinsic  or  commodity  value  in  gold  and  silver  coin,  but 
rigorously  true  and  clearly  following  from  the  demonstrated 


40 


POLITICAL  ECONOMY. 


truth  that  all  money  is  but  a  series  of  units,  limited  either 
by  the  commodities  actually  exchanged  for  each  other,  or  by 
the  units  manufactured  out  of  any  given  material.  It  is  im- 
possible that  money  should  be  anything  else.  Suppose  for 
one  moment  gold  coin  to  be  a  commodity  like  wheat.  The 
wheat  must  first  be  valued  in  the  coin,  and  then  the  coin  in 
the  wheat,  or  the  coin  must  first  be  valued  in  the  wheat,  and 
then  the  wheat  in  the  coin,  by  means  of  a  relative  valuation 
of  each  in  the  other.  This  relative  valuation  requires  the 
mental  use  of  units  of  valuation  like  the  macoutes,  and  then, 
coin  would  cease  to  be  money.  It  is  utterly  impossible  for 
money  of  any  kind  to  be  anything  but  a  limited  and  localized 
macoute.  Paper  money  without  any  metal  to  limit  it  is 
limited  only,  so  far  as  it  is  limited  at  all,  by  the  units  of  all 
commodities,  as  well  those  produced  as  those  actually  dis- 
tributed for  consumption.  This  is  the  limit  of  all  paper 
money  issued  to  solvent  borrowers.  If  issued  only  to  such 
borrowers,  and  if  production  could  never  by  any  possibility 
gain  upon  consumption,  —  the  latter  balancing  the  former,  — 
prices  would  be  steady,  and  paper  without  any  reserve  might 
then  be  said  to  vary  as  gold  would  vary.  But  to  distribute 
money  by  means  of  loans,  in  proportion  to  production,  by 
paying  money  for  all  the  labor  which  causes  that  production, 
when  production  is  rapidly  gaining  upon  consumption,  is  to 
cause  unsteady  and  rapidly  advancing  prices,  until  arrested 
by  a  crisis  in  production  and  labor,  which  crisis,  as  an  active 
cause  paramount  to  all  others,  turns  the  scale  of  prices  upside 
down.  But  there  is  a  practical  demonstration,  now  working 
itself  out  before  the  eyes  of  the  commercial,  banking,  and 
scientific  world,  that  silver  coin  is  not  a  commodity.  If  it  is 
a  commodity,  why  has  not  the  exchangeable  value  of  silver 
coin  in  the  countries  where  it  remains  in  use  followed  the 
bullion  value  of  silver  in  the  world's  market  in  London  ? 
Governments  cannot  fix  the  value  of  commodities.  Why 
has  not  silver  lost  exchangeable  value  in  Germany  and 
France  corresponding  to  the  loss  of  bullion  value  in  Lon- 
don ?  Why  has  it  not  lost  purchasing  power  in  the  East 
Indies,  and  China,  and  every  other  country  where  it  is  stil] 


DEVELOPMENT  OF  MONEY  AND  ITS  USES.  41 


in  use  as  money  ?  The  true  answer  is,  because  the  exchange- 
able or  unit  vahie  of  coin  as  money,  and  not  as  material  to 
manufacture  money,  can  change  only  as  the  units  are  coined 
and  distributed  through  commerce.  The  coin  value  will 
then,  after  the  lapse  of  a  considerable  period,  coincide  with 
the  bullion  value ;  and  such  will  be  the  fate  of  gold  as  coin. 
The  loss  in  the  purchasing  power  of  silver  will  be  balanced 
by  an  equal  gain  in  gold ;  the  gain  in  the  latter  will  take 
place  as  slowly  as  the  loss  in  the  former ;  and  neither  will 
be  productive  of  appreciable  loss  to  anybody.  The  incon- 
veniences which  would  result  by  the  adoption  of  silver  by  a 
large  commercial  nation  like  the  United  States,  acting  singly, 
are  discussed  hereafter. 

Money  is  the  all-important  subject  in  modern  times,  espe- 
cially for  commercial  nations  of  such  wealth  and  such  pro- 
ductive energies  as  Great  Britain,  France,  and  the  United 
States.  This  is  the  reason  why  I  have  made  it  the  subject 
of  my  first  chapter ;  for  it  is  impossible  to  have  a  correct  con- 
ception of  Production  and  Distribution,  or  Commerce,  with- 
out a  correct  conception  of  money  and  its  uses.  The  use  of 
money,  therefore,  by  way  of  loans,  causing  an  expansion  of 
its  use  or  circulation,  I  shall  call  expansion  of  circulation, 
and  its  return  or  payment  back  to  the  lender  a  contraction  of 
circulation.  There  are  two  aspects  of  Production  and  Dis- 
tribution :  first,  production  and  distribution  as  resulting  from 
the  use  of  money ;  and  secondly,  the  use  of  money  itself  as 
it  appears  in  the  increase  or  diminution,  the  expansion  or 
contraction  of  its  use,  when  its  natural  distribution  is  not 
disturbed  ;  and  thirdly,  the  unnatural  or  artificial  disturb- 
ance of  that  distribution  —  unnatural  because  not  allowed 
to  remain  where  the  natural  distribution  of  commodities, 
otherwise  called  commerce,  left  it  —  by  the  enlargement  of 
the  use  or  circulation  of  money  beyond  what  could  follow 
that  natural  distribution,  by  consolidating  it  in  large  deposit 
reserves  and  thus  giving  rise  to  increased  loans. 

Money,  under  these  different  aspects,  is  the  principal  topic 
of  the  following  pages,  in  connection  with  the  production 
and  distribution  which  it  causes  to  take  place;  and  Produc- 


42 


POLITICAL  ECONOMY. 


tion  and  Exchange  constitute  the  science  of  Political  Econo- 
my. The  mercantile  theory  of  gold  and  silver  coin  as  a  com- 
modity possessed  of  intrinsic  value  has  undoubtedly  solved 
some  important  truths ;  or,  rather,  it  has  not  prevented  the 
solution  of  them,  because,  as  a  result,  or  as  an  effect  of  gold 
and  silver  having  come  into  general  use  as  money,  it  may 
be  regarded  as  substantially  true.  Because  gold  and  silver 
are  and  long  have  been  in  use  as  money,  they  possess  a 
value  in  exchange  which  they  would  not  otherwise  possess. 
Vast  masses  of  these  metals  have  been  manufactured  into 
coin,  which  would  never  have  been  mined  had  they  not 
been  long  before  in  use  as  money ;  a  dollar  in  gold  is  prob- 
ably not  worth  all  the  labor  it  cost,  but,  on  the  average, 
much  less.  If,  however,  the  miner  cannot  earn  a  living  of 
average  comfort  at  mining,  and  a  little  more,  he  will  in  the 
end  abandon  it  and  work  at  something  else.  In  this  sense 
and  to  this  extent  the  result  of  all  the  causes  in  operation  is 
to  pay  the  miner  for  his  work  a  fair  rate  of  wages.  The 
Chinese  pursue  in  California  the  business  of  mining  at  the 
rate  of  fifty  cents  or  less  per  day,  where  American  miners 
have  long  since  abandoned  the  ground. 

What  I  ask  the  reader  to  do  after  perusing  this  chapter  is 
to  divest  himself,  if  he  can  for  a  time,  of  his  preconceived 
ideas  of  money  and  the  "  circulation "  or  use  of  money. 
Gold  or  silver  coin  is  not  a  commodity  like  wheat,  because 
it  is  not  governed  by  the  laws  of  ordinary  commodities.  Can 
any  people  or  any  government,  by  a  mere  conventional  ar- 
rangement, either  raise  or  put  down  the  exchangeable  value 
of  wheat,  except  by  raising  the  cost  to  the  consumer  through 
a  tax  or  tariff  ?  Can  they  do  it  by  a  mere  legislative  enact- 
ment or  by  a  decree  ?  Can  wheat,  without  the  imposition  of 
any  tax  or  tariff,  and  by  mere  legislative  enactment,  or  by  de- 
cree or  order,  be  made  worth  11.50  per  bushel  in  London,  and 
11.75  in  Paris  or  Berlin,  assuming  that  it  would  cost  less 
than  a  cent  and  a  half  per  bushel  to  carry  it  from  London 
to  Paris  or  Berlin  ?  If  gold  or  silver  coin  is  a  commodity 
in  the  ordinary  meaning  of  that  word ;  if,  as  the  followers 
of  Smith  and  Say  assert,  an  exchange  of  wheat,  cloth,  or  iron, 


DEVELOPMENT  OF  MONEY  AND  ITS  USES. 


43 


for  gold  or  silver  coin,  is  an  act  of  barter,  like  that  of  the 
savages  who  reckoned  in  macoutes ;  and  so,  if  the  owner  of 
a  commodity  wants  to  obtain  another  commodity  in  exchange 
for  it,  he  must  first  barter  his  commodity  for  money,  and 
then  barter  his  money  for  the  commodity  he  wants,  —  per- 
forming in  this  manner  what  they  call  an  act  of  double  bar- 
ter, —  then,  instead  of  exchange  having  developed  upwards, 
it  has  developed  downwards  ;  because  two  acts  of  barter  are 
required  to  satisfy  our  wants  where  one  was  sufficient  for  the 
savages  who  used  the  macoutes.  Again,  could  all  the  world 
abandon  the  use  of  wheat  and  live  on  a  substitute  ?  Could 
all  the  world  redeem  all  the  wheat  in  the  world  with  another 
commodity  or  substitute,  and  put  the  wheat  aside  and  re- 
frain from  consuming  it  ?  This  surely  cannot  be  done  with 
wheat,  but  it  can  be  done  with  gold  and  silver  coin ;  and  it 
has  been  partially  done  already  in  respect  to  silver,  as  well 
as  gold.  What  is  the  reason  for  this  difference?  It  surely 
is  not  that  gold  bullion  or  silver  bullion  is  not  a  commodity, 
because  it  is  impossible  to  doubt  upon  that  point.  Gold 
bullion  and  silver  bullion  are  unquestionably  commodities ; 
quite  as  much  so  as  wheat.  Wherein  then  lies  the  differ- 
ence between  a  dollar  in  gold  or  silver  and  the  gold  or  silver 
bullion  contained  in  it?  The  difference  lies  in  the  fact 
that  the  gold  dollar  as  well  as  the  silver  dollar  is  a  unit  of 
value,  of  purchase,  and  of  payment,  and  can  by  no  possibility 
be  anything  else,  while  the  metal  contained  in  the  dollar, 
aside  from  its  use  as  money,  is  not.  But  suppose  the  bullion 
to  be  assayed  and  weighed  (and  to  pass  as  readily  as  the- 
coin,  as  it  did  in  olden  time),  is  there  then  any  essential  dif- 
ference ?    Surely  not ;  the  difference  is  only  superficial. 

Where  then  lies  the  true  difference  between  gold  and  sil- 
ver as  bullion  and  gold  and  silver  as  money  ?  The  real  dif- 
ference lies  in  the  fact  that  all  money  is  a  human  contriv- 
ance :  it  is  a  process :  it  is  a  method  of  calculating  values  by 
means  of  a  ratio  :  it  is  a  conventional  arrangement,  and  there- 
fore the  value  of  the  bullion,  so  far  as  that  value  is  enhanced 
by  its  adoption  as  material  to  make  units  of  money,  is  al- 
together conventional ;  and  being  conventional  it  must  nee- 


44 


POLITICAL  ECONOMY. 


essarily  be  used  in  the  shape  and  character  of  a  unit  of  val- 
uation, purchase,  and  payment.  The  greater  the  number  of 
units  on  the  average  employed  to  purchase  units  of  com- 
modities, the  higher  will  be  prices ;  the  less  the  number,  the 
lower  will  be  prices.  Hence  the  part  or  portion  of  bullion 
value  which  convention  has  given  convention  can  take  away. 
If  convention  takes  away  a  portion  of  this  value  in  any  one 
country  by  demonetization,  it  is  impossible  for  this  demone- 
tization to  take  away  the  purchasing  power  of  the  bullion  in 
its  character  of  units  of -valuation,  purchase,  and  payment  in 
any  other  country  faster  than  the  number  of  these  units 
are  increased  in  that  country  by  coinage,  in  consequence  of 
the  cheapening  of  the  bullion  through  demonetizations  else- 
where. This  is  a  gradual  process,  and  when  completed  the 
coin  value  and  the  bullion  value  will  coincide,  and  not  be- 
fore. The  reason  for  all  this  is,  that  the  value  of  bulUon 
in  its  character  of  money  is  conventional.  If  a  part  of  the 
commercial  world  abandons  the  convention,  while  another 
part  adheres  to  it,  the  market  price  of  the  bullion,  whether 
gold,  silver,  tin,  or  copper,  must  fall,  but  the  purchasing 
power  of  the  unit  of  bullion,  in  those  countries  where  the 
bullion  is  still  used  as  money,  must  to  a  mathematical  cer- 
tainty continue  the  same,  until  the  units  are  gradually  in- 
creased in  number  through  the  cheapening  of  the  material 
of  which  they  are  made.  Coined  bullion  being  a  series  of 
units,  all  valuations  are  by  ratios,  and  the  resulting  pur- 
chases are  accomplished  by  delivery  of  the  valuing  units 
localized  in  the  bullion  or  the  bank  or  government  note ; 
and  they  might  he,  although  they  are  not,  localized  in  mer- 
cantile paper,  or  bank  debt,  transferred  by  check.  Hence, 
in  the  following  pages,  I  sometimes  call  the  unit  of  valua- 
tion, purchase,  and  payment  (money),  whether  localized 
in  coin  or  paper,  a  conventional  commodity,  because  by 
that  tacit  convention  which  has  been  developed  out  of  the 
progress,  out  of  the  absolute  and  out  of  the  relative  wants  of 
mankind,  one  of  the  two  real  commodities  actually  needed 
for  use  and  consumption,  and  brought  together,  and  valued 
and  exchanged  for  each  other,  by  the  process  of  macoutes  or 


DEVELOPMENT  OF  MONEY  AND  ITS  USES. 


45 


any  other  contrivance  of  valuation  has  given  way  to  a  con- 
ventional commodity  having  universal  exchangeable  value  as 
such  wherever  it  is  used.  The  productive  energies  of  all 
English  speaking  people  have  been  developed  to  a  high  de- 
gree. All  have  a  general  knowledge  of  manufacturing 
processes,  the  division  of  labor,  and  the  improvements  in 
agriculture,  in  manufactures,  and  in  machinery  of  all  sorts. 
The  problem  is  to  harmonize  production  ;  and  this  can  only 
be  done  by  preventing  as  far  as  possible  production  on  credit, 
which  cannot  proceed  very  far  without  borrowing  largely 
the  necessaries  of  life  under  color  of  the  conventional  com- 
modity called  money,  —  from  proceeding  to  that  point  where 
the  only  remedy  is  a  reaction  in  the  shape  of  a  commercial 
crisis.  Hence,  in  order  to  demonstrate  my  propositions  in 
relation  to  this  all-important  subject,  which  really  embraces 
all  the  practical  knowledge  required  to  understand  the  forces 
at  work  in  production  and  exchange,  I  shall  examine,  in 
future  chapters,  the  numerous  complex  processes  developed 
from  the  use  of  this  conventional  commodity  called  money. 
This  examination  is  the  principal  subject  of  the  several 
chapters  of  this  book ;  and  the  necessary  consequence  is  the 
repetition  from  time  to  time  of  the  same  general  proposition, 
as  the  result  of  the  analysis  of  the  various  processes,  which, 
although  apparently  different  in  themselves,  lead  substan- 
tially to  the  same  result.  He  who  can  master  all  the  move- 
ments and  all  the  results  of  that  conventional  commodity 
called  money,  can  master  the  movements  and  results  of  pro- 
duction and  exchange ;  and  he  who  has  mastered  the  former, 
has  already  mastered  the  latter.  In  this  chapter  I  have 
given  a  general  outline  of  the  real  character  and  actual  uses 
of  money ;  and  this  will  prepare  the  reader  to  comprehend 
more  clearly  the  next  chapter,  and  those  which  follow. 
The  analysis  of  banking  in  England  and  the  United  States 
in  the  following  chapters  is  perhaps  too  minute;  but  the  pre- 
vailing opinion,  that  commodities  give  rise  to  bank  credits 
which  are  an  objective  reality  or  cause,  instead  of  being,  as 
they  really  are,  the  mere  effect  or  subjective  result  of  using 
the  money  of  depositors  —  thus  giving  it  an  additional  circu- 


46 


POLITICAL  ECONOMY. 


lation  over  and  above  that  given  it  at  the  same  time  by  the 
depositors,  who  are  the  real  owners  of  the  money,  —  renders 
this  minute  analysis  necessary.  It  is  necessary  in  order  to 
demonstrate  that  it  is  not  the  depositors'  credit  or  the  bank's 
debt  which  pays  for  commodities,  but  the  money  in  the 
bank  reserve,  which  is  the  consolidation  of  all  the  reserves 
of  the  different  depositors,  and  which,  through  deposit  and 
redeposit,  is  amply  sufficient  to  meet  all  the  calls  of  deposit- 
ors after  having  made  the  whole  volume  of  loans.  These 
loans  have  been  made  once  for  all,  and  need  no  more  money 
to  sustain  them  ;  it  is  the  uncertain  and  varying  reserve,  out 
of  which  and  in  which  the  units  of  coin  and  bank-notes 
which  pay  for  commodities  are  placed  from  time  to  time  in 
the  various  ratios  of  price,  and  which  assume  the  appear- 
ance of  credits  used  instead  of  money,  —  it  is,  I  say,  this  un- 
certain and  varying  reserve  which  makes  the  unit  of  gold, 
of  silver,  and  of  bank-notes  virtually  an  equivalent  for  so 
many  units  of  bank  credit.  This  happens,  because  all 
money  is  but  a  series  of  units  as  before  stated,  and  the  real 
and  only  utility  of  such  a  varying  reserve  is,  that  it  limits, 
not  loans,  —  for  that  is  impossible  with  such  a  reserve,  —  but 
the  scale  or  height  to  which  prices  can  be  carried,  and  there- 
fore the  depth  to  which  they  can  be  lowered  ;  such  a  reserve 
is  an  imperfect  limitation  to  the  whole  volume  of  money 
units  in  circulation,  and  therefore  in  deposit.  The  germ  of 
money  is  an  ideal  unit,  like  the  macoute,  used  mentally  to 
compare  the  values  of  two  commodities  brought  together  for 
exchange.  Each  commodity  was  valued  in  units  limited  by 
the  commodity  itself,  and  the  units  of  each  commodity  were 
then  compared  with  those  of  the  other. 

The  next  stage  of  development  in  natural  order  was  to 
embody  the  unit  or  macoute  in  a  commodity  of  universal  ex- 
change, which  thus  not  only  furnished  a  unit  of  valuation, 
but  also  a  commodity  of  universal  acceptance,  and  so  of 
universal  exchange.  A  valuation  by  units  is  therefore  the 
root  and  origin  of  all  money,  behind  which  lies  the  commodity 
which  embodies  and  thus  limits  them.  It  is  a  mathematical 
impossibility  for  money  to  be  used  in  any  other  way.  But 


DEVELOPMENT  OF  MONEY  AND  ITS  USES. 


47 


because  gold,  silver,  copper,  and  other  metals  which  are  ma- 
terial substances  and  highly  useful  commodities,  have  been 
in  use  from  the  earliest  periods  in  the  shape  of  units  of  weight 
which  have  not  only  the  valuing  power  of  the  unit  or  ma- 
coute,  but  the  purchasing  and  paying  power  of  a  valuable 
commodity  as  an  article  of  universal  exchange,  these  units 
of  weight  are  in  one  sense  commodities  as  much  as  bushels  of 
wheat ;  but  so  far  as  they  have,  or  by  any  possibility  can 
have,  any  effect  upon  the  prices  of  those  commodities  for 
which  they  are  given  universally  in  exchange,  they  must  be 
actually  used  or  put  in  circulation  in  exchange  for  those 
commodities.  Hence  the  price  of  silver  bullion  in  London 
cannot  affect  the  exchangeable  value  or  purchasing  power  of 
the  silver  unit  in  Germany  or  France,  because  these  govern- 
ments have  stopped  the  free  coinage  of  such  units.  Hence, 
also,  the  apparent  anomaly  of  a  variation  of  ten  to  fifteen  per 
cent,  between  the  value  of  silver  bullion  in  London,  reckoned 
in  gold  units,  and  the  purchasing  power  or  value  of  the  same 
silver  bullion  in  the  shape  of  units  of  weight  reckoned  in 
units  of  gold  in  Paris  and  Berlin.  Imperial  power  cannot 
fix  the  value  of  any  commodity  like  wheat,  reckoned  in  other 
commodities  or  in  money,  but  it  can  fix  the  purchasing  power 
of  a  commodity  like  silver  in  the  shape  of  units  of  weight,  as 
compared  with  those  of  gold,  for  the  purposes  of  money ^  up 
to  a  certain  point  explained  hereafter.  Were  silver  the  only 
material  used  as  money  throughout  the  commercial  world, 
imperial  power  could  not  accomplish  this  task  of  fixing  the 
purchasing  power  of  silver  without  adopting  some  other  ma- 
terial for  money  in  addition  to  silver,  by  means  of  which  to 
fix  it:  it  could  no  more  accomplish  such  a  task  than  it  can 
alter  the  rules  of  mathematical  proportion,  as  will  be  .further 
shown  hereafter.  Gold,  silver,  or  any  other  commodity, 
therefore,  when  used  as  a  universal  medium  of  exchange, 
ceases  to  be  governed  by  the  ordinary  laws  of  supply  and  de- 
mand in  its  character  of  money,  because  its  value  is  wholly 
conventional  so  far  as  it  is  used  as  money,  and  lies  in  those 
things  it  procures,  and  not  in  itself. 

Upon  this  analysis,  it  is  possible  to  comprehend  the  truth 


48 


POLITICAL  ECONOMY. 


of  the  general  assertion  and  the  general  belief,  that  gold  and 
silver  form  the  safest  and  best  currency  possible.  The  true 
reason  for  this  belief  is,  that  all  money  is  but  a  process  or 
contrivance  for  the  exchange  of  commodities  principally,  and 
capital  incidentally ;  and  silver  and  gold,  looking  at  the 
masses  of  these  metals  in  the  shape  of  units  of  weight,  and 
the  annual  ratios  of  their  production  to  the  existing  accumu- 
lation, furnish  not  only  units  of  valuation,  limited  by  these 
metals  as  commodities,  but  also  what  may  be  called  a  con- 
ventional substitute  in  the  place  of  one  of  the  two  commodi- 
ties brought  together  for  exchange,  as  in  the  case  of  the  ma- 
coutes.  Barter  has  in  this  manner  been  long  since  super- 
seded by  the  universal  use  of  a  substitute  for  one  of  the  two 
real  commodities  whose  exchange  constitutes  what  is  called 
barter.  Hence  it  follows  naturally,  that  notes  promising  to 
deliver  on  demand  units  of  metal,  if  universally  acceptable 
and  entitled  to  confidence,  may  be,  as  they  have  been  and 
are,  used  in  the  place  of  the  metallic  unit  itself ;  and  still 
further,  that  notes  of  the  same  kind  not  convertible,  but  pos- 
sessed of  equal  credit,  may  be  used  in  like  manner.  The  lat- 
ter, when  used,  are  not  redeemed  or  redeemable  in,  and  there- 
fore not  limited  by,  units  which  are  themselves  limited  by  a 
commodity  of  universal  exchange,  like  gold  or  silver,  nor  by 
real  commodities  actually  exchanged,  as  in  the  case  of  the 
macoutes,  and  therefore  constitute  an  unstable  and  fluctuat- 
ing currency.  I  have  by  this  general  analysis  shown  why 
and  wherein  a  commodity  like  gold  or  silver  is  absolutely 
essential  to  limit  the  units  of  valuation,  purchase,  and  pay- 
ment, which,  when  localized,  we  call  money.  It  follows  that 
paper  and  "  credit  "  money  of  all  kinds,  in  order  to  furnish 
stable  prices,  must  be  limited  by  units  of  metal  used  in  a 
definite  ratio  to  the  former,  and  circulating  freely  with  them. 
This  general  proposition,  which  is  the  result  of  the  foregoing 
analysis,  will  be  fully  developed,  and  rigorously  demonstrated 
in  a  practical  manner,  at  the  various  angles  of  observation 
from  which  the  process  of  exchanges  through  money  can  be 
viewed,  in  the  following  chapters.  It  follows  further  from 
the  analysis,  that  it  is  absolutely  impossible  for  any  "  scarcity 


DEVELOPMENT  OF  MONEY  AND  ITS  USES.  49 


of  gold  or  silver  as  material  to  make  the  money  unit  to  occur, 
because  the  value  of  the  unit  in  exchange  must  gradually  in- 
crease with  the  gradual  annual  increase  of  commerce  over 
annual  metallic  production,  and  gradually  diminish  with  the 
gradual  annual  increase  of  metallic  production  over  the  an- 
nual increase  of  commerce. 

It  is  impossible  to  understand  or  to  have  any  adequate 
conception  of  the  forces  at  work  to  stimulate  production  in 
this  last  quarter  of  the  nineteenth  century  without  having 
a  true  conception,  or  theory,  if  one  chooses  so  to  call  it,  not 
merely  of  money,  but  of  the  manner  in  which  it  is  used. 
It  has  required  long  reflection  and  rigorous  abandonment  of 
all  existing  theories  of  money,  with  a  strong  desire  to  ascer- 
tain the  truth,  to  enable  me  to  arrive,  step  by  step,  at  the 
theory  of  money  given  in  this  chapter.  The  grand  proposi- 
tion which  I  have  demonstrated,  and  which  I  again  announce, 
is  that  money  is  entirely  a  relative  affair  or  process,  having, 
therefore,  no  independent  existence  of  itself,  and  no  actual 
existence  except  in  use ;  that  money  is  not  a  commodity, 
but  a  series  of  units  placing  themselves  in  the  denominators 
of  the  several  ratios  of  price,  the  units  of  commodities  and 
capital  sold  placing  themselves  in  the  numerators,  —  the 
measuring  units  being  limited  by  a  commodity  like  gold,  sil- 
ver, or  copper,  in  which  they  may  be  embodied  or  (through 
bank  or  government  notes  or  bank  debt  of  any  kind)  limited, 
either  perfectly  or  imperfectly,  by  those  metallic  units ;  and 
thus  adding,  in  the  former  case,  a  definite,  and  in  the  latter 
case  an  indefinite,  sum  to  the  total  of  the  metallic  units  as 
these  are  distributed  naturally  through  the  exchanges  of  com- 
modities. In.  the  former  case  a  true,  exact,  and  perfect 
"  metallic  basis,"  in  the  latter  a  false,  inexact,  and  imperfect 
one  is  attained. 

It  is  absolutely  impossible  for  all  governments  combined 
to  change  or  to  affect  in  the  slightest  degree,  as  a  whole,  the 
purchasing  power  or  exchangeable  value  of  all  the  units 
embodied  in  gold,  if  we  assume  that  to  be  the  only  money 
in  use  ;  and  so  of  silver  or  any  other  metal,  singly  and  solely 
used  as  money,  and  distributed  in  coin  throughout  the  com- 
4 


50 


POLITICAL  ECONOMY. 


mercial  world.  If  the  United  States,  in  such  a  case  (where 
gold,  for  instance,  is  the  only  money),  coins  dollars,  and 
Great  Britain,  adding  a  little  more  gold  to  her  sovereign  or 
pound  sterling,  whichever  we  choose  to  call  her  unit,  puts 
in  it  five  times  as  much  gold  as  there  is  in  the  dollar,  the 
conventional  value  of  the  coins  is  directly  as  their  respective 
weights,  and  inversely  as  the  respective  numbers  of  like 
coins  which  could  be  made  out  of  the  whole  coined  mass  of 
gold  throughout  the  commercial  world,  first  in  the  shape  of 
dollars,  and  secondly  in  the  shape  of  sovereigns  or  pounds. 
Again,  if  dollars  alone  were  in  use  throughout  the  commer- 
cial world,  no  real  change  of  purchasing  power  would  take 
place,  by  general  recoinage  in  the  shape  of  half  eagles,  the 
total  purchasing  power  would  remain  the  same,  the  purchas- 
ing power  of  each  unit  being  increased  five  times,  while  its 
mass  increases  in  like  proportion. 

All  this  happens  under  free  coinage  for  all  who  bring  gold 
bullion  to  the  mints.  But  suppose  the  United  States  choose 
to  coin,  on  their  own  account,  what  are  called  gold  tokens, 
while  all  the  coins  throughout  the  commercial  world  (gold 
being  the  only  money  in  use)  are  of  the  weight  of  the 
English  sovereign  increased  so  as  to  make  it  equal  to  our 
present  half  eagle.  Let  the  token  be  in  weight  one  fifth 
that  of  the  present  half  eagle,  with  a  device  peculiar  to  itself, 
and  let  it  be  made  by  law  legal  tender  for  the  same  amount 
with  the  half  eagle,  under  an  issue  of  tokens  to  the  amount 
of  fifty  millions,  nominally.  Suppose  this  to  be  the  only  in- 
stance of  token  coinage  throughout  the  commercial  world  ; 
what  will  be  the  consequence  ?  Will  the  tokens  pass  for 
half  eagles,  each,  although  they  contain  but  one  fifth  of  the 
weight  of  a  half  eagle  ?  Doubtless  they  will ;  but  what 
then  ?  Free  coinage  existing  elsewhere,  and  in  the  United 
States  also,  with  the  single  exception  of  the  fifty  millions  in 
tokens,  what  will  be  the  effect  of  this  coinage  on  the  pur- 
chasing power  or  exchangeable  value  of  the  half  eagle,  which 
contains  full  weight  ?  Will  its  value  be  diminished  ;  and  if 
diminished,  in  what  proportion  ?  It  will  be  diminished  in 
exact  proportion  to  the  increase  in  the  number  of  standard 


DEVELOPMENT  OF  MONEY  AND  ITS  USES.  51 


units,  in  consequence  of  the  coinage  of  tokens  of  one  fifth 
weight,  by  the  United  States,  to  the  amount  of  fifty  millions. 
If  the  total  of  gold  half  eagles  were  one  thousand  millions 
before  the  coinage  of  tokens  the  total  number  of  units  would 
thus  be  increased,  and  therefore  the  average  purchasing 
power  of  the  unit  would  be,  in  the  course  of  time,  increased 
four  per  cent.  But  the  tokens  are  not  directly  redeemed  by 
the  United  States  in  half  eagles  on  demand  ;  and  how  then 
will  they,  how  can  they,  circulate  side  by  side  with  the 
half  eagles  of  full  weight  ?  They  will  circulate,  because 
they  will  by  law,  and  therefore  general  consent,  buy  as  many 
half  eagles  of  full  weight,  which  constitutes  a  real  and  con- 
tinual redemption  ;  for  it  is  a  mistake  to  suppose  that  they 
are  not  redeemed.  They  will  be  further  redeemed  by  the 
government,  which  receives  and  pays  them  out  as  if  they 
were  of  full  weight,  and  they  are  constantly  redeemed  by 
every  seller  who  takes  them  of  the  buyer  at  the  same  rate 
they  cost  him.  This  is  what  is  called  economy  of  metal; 
precisely  of  the  same  kind  with  that  which  would  be,  and 
perhaps  will  be,  effected  by  the  United  States  should  they 
constantly  maintain  an  issue  of  forty  millions  of  treasury 
notes  after  redemptions  are  inaugurated  by  the  government 
and  the  banks  ;  and  precisely  like  that  which  is  effected  by 
any  paper  or  credit  currency  maintained  in  one  unvarying 
ratio  with  metal.  But  it  is  all  an  illusion  to  suppose  this 
to  have  been  in  the  past,  or  by  any  possibility  to  be  in  the 
future,  real  and  true  economy,  except  as  hereinafter  ex- 
plained. Because  the  metal  is  in  use  as  money  through- 
out the  commercial  world,  it  is  simply  and  purely  an  artifi- 
cial arrangement  to  diminish  the  exchangeable  value  of  the 
metallic  unit,  and  consequently  the  paper  unit  which  circu- 
lates side  by  side  with  it. 

It  follows  logically,  as  in  point  of  fact  it  has  followed, 
that  where  one  country,  like  France,  maintains  for  the  most 
part  a  metallic  circulation,  other  countries,  like  England  and 
much  more  the  United  States,  have  supplemented  their  loss 
of  bullion  by  what  is  called  (erroneously)  bank  debt  by 
book,  and  by  what  is  correctly  called  bank  paper  or  bank- 


52 


POLITICAL  ECONOMY. 


notes.  The  bank  debt  is  not  the  supplement,  but  the  circu- 
lation of  gold  in  the  reserve  through  the  use  of  bank  debt. 
To  disturb  the  ratios  of  the  annual  distribution  of  bullion, 
by  largely  increasing  the  bullion  in  the  shape  of  bank  re- 
serve and  circulation  in  England  or  the  United  States, 
vrould  be  injurious  in  its  effects ;  and  not  to  disturb  this 
distribution  at  present  is  good  economy.  What  is  wanted 
in  both  countries  is  to  place  and  keep  the  bullion  they  have, 
with  some  addition,  in  the  United  States,  together  with  the 
annual  increase,  in  definite  and  steady  ratios  to  all  other 
units  of  money,  in  the  shape  of  bank  debt. 

It  is  absolutely  certain  that  the  total  purchasing  power 
of  any  one  metal  used  alone  as  money,  in  the  shape  of  units 
of  weight,  or  in  the  shape  of  such  units  supplemented  in 
definite  ratios  by  units  of  bank  debt,  or,  for  like  reasons,  by 
units  of  personal  or  individual  debt,  should  they  by  any 
possibility  be  used  as  money,  can  neither  be  increased  nor 
diminished,  because  increase  only  adds  to  the  number  of 
units  in  the  denominator  of  each  ratio  of  price,  decreasing 
at  the  same  time  in  exact  proportion  the  purchasing  power 
of  each  ;  w^hile  diminution  only  takes  away  from  the  denom- 
inator of  each  ratio  of  price,  at  every  purchase  and  sale,  a 
certain  number  of  intangible  units,  increasing  at  the  same 
time  in  exact  proportion  the  purchasing  power  of  those 
units  which  remain  in  the  denominator.  But  I  have  sup- 
posed gold,  or  gold  supplemented  by  bank  debt,  to  be  the 
only  money  in  use.  Introduce  silver,  and  what  will  be  the 
result  ?  Will  there  or  can  there  be  any  difference  ?  There 
can  by  no  possibility  be  any  difference  resulting,  as  to  the 
main  proposition,  which  is,  that  total  purchasing  power  can 
neither  be  increased  nor  diminished,  because  the  units  of 
each  metal  in  the  several  denominators  of  the  several  ratios 
of  price,  made  at  each  purchase  and  sale,  can  only  count 
units  ;  and  the  price  will  be  in  reality  the  same  whatever 
the  unit  of  weight  of  each  metal  may  be.  But  the  number 
of  units  of  gold,  when  that  was  the  only  metal  used,  de- 
pended on  the  number  into  which  the  total  mass  in  the  shape 
of  money  was  divided ;  the  greater  the  number,  the  less  the 


DEVELOPMENT  OF  MONEY  AND  ITS  USES. 


53 


purchasing  power  of  each,  and  the  smaller  the  number,  the 
greater  the  purchasing  power  of  each.  Weight,  therefore, 
necessarily  determined  the  purchasing  power  of  each  unit. 
It  follows  that  if  silver  comes  into  general  use  as  money 
without  its  ratio  to  gold  as  money  being  fixed,  the  purchas- 
ing power  of  an}^  one  of  its  units  must  be  to  a  unit  of 
gold  inversely  as  the  respective  weights  of  each  unit,  and 
therefore  inversely  as  the  respective  masses  by  weight  of 
each  metal  coined.  It  further  follows  that  the  whole  com- 
mercial world  can  agree,  and  can  also  mutually  carry  into 
effect  the  agreement,  to  refuse  to  coin  silver,  according  to 
what  may  be  called  this  natural  (because  necessary,  so  long 
as  undisturbed)  relation  of  the  two  metals,  in  point  of  pur- 
chasing power,  by  changing  the  ratio  from  say  15^  to  1, 
to  20  to  1.^  They  can  refuse  to  coin  silver  except  when 
twenty  pounds  of  silver  sells  in  the  bullion  market  for  one 
pound  of  gold,  and  to  stop  coining  silver  as  soon  as  it  be- 
gins to  rise  above  that  ratio.  The  total  purchasing  power 
of  all  the  gold  and  silver  will  then  equal  exactly  the  total 
purchasing  power  of  all  the  gold,  when  gold  was  the  only 
metal  in  use  as  money.  But,  again,  if  the  ratio,  in  the  ab- 
sence of  legislation,  fixes  itself,  as  it  assuredly  will,  15^  to  1 
being  found,  for  instance,  to  be  the  natural  ratio,  the  total 
purchasing  power  of  the  two  metals  will  still  be  that  of  gold 
before  silver  was  monetized,  and  consequently  the  total  pur- 
chasing power  of  the  two  metals,  which  is  also  the  total  pur- 
chasing power  of  the  one  metal  gold,  before  the  monetiza- 
tion  of  silver,  will  now  be  equally  divided  between  the  two 
metals,  gold  and  silver.  Silver  will  take  from  gold  one  half 
its  purchasing  power  very  gradually,  and  so  gradually  as  to 
create  no  important  disturbance  in  the  commercial  world  of 
production  and  distribution.  Gold  and  silver  being  thus 
allowed  to  take  their  natural  course,  in  respect  to  the  distri- 
bution of  purchasing  power  between  them,  which  distribu- 
tion, left  to  itself,  can  by  no  possibility  take  place  in  any 
other  manner,  or  in  any  other  proportion  than  that  stated 

1  This  would  really  be  bad  economy,  because  it  would  check  the  production 
of  silver,  and  deprive  it  of  a  portion  of  its  one  half  of  total  purchasing  power 


54 


POLITICAL  ECONOMY. 


(exact  equality),  the  weight  of  the  total  mass  of  silver  and 
gold  in  coin  will  be  greater  by  4i  pounds  of  silver  for  every 
15^  pounds  of  silver  and  every  pound  of  gold  coined  than 
where  all  governments  agree  by  treaty,  sustained  by  ade- 
quate legislation,  to  coin  only  when  and  so  long  as  the  ratio 
continues  at  the  rate  of  20  to  1,  instead  of  15^  to  1.  To 
coin  at  the  former  ratio  would  be  a  real  saving  (whether  an 
economical  one  is  not  the  inquiry  now)  of  a  fraction  more 
than  twenty-one  per  cent,  in  the  total  mass  by  weight  of 
gold  and  silver  used  as  money.  All  this  results  because 
metallic  money  is  a  series  of  units  of  valuation,  purchase,  and 
payment,  localized  in  and  limited  by  the  metallic  commodity 
of  which  they  are  made.  This  limitation  is  essential,  not 
because  total  purchasing  power  could  be  made  greater  by  an 
indefinite  increase  of  the  units,  or  made  less  by  an  indefinite 
diminution  of  them,  but  because  it  is  essential,  in  order  to 
keep  the  purchasing  power  steady,  in  the  hands  of  successive 
holders. 

Money  is  not  a  commodity,  but  a  process  of  valuation  by 
units,  followed  up  by  the  delivery  of  the  units,  localized  in 
metal  or  debt,  as  a  substitute  or  conventional  commodity. 
Upon  this  analysis  it  is  easy  to  understand  why  metal  has 
been  so  generally  believed  to  be  a  steadier  and  safer  cur- 
rency than  bank-notes  or  any  other  form  of  debt,  however 
safe  and  well  secured,  for  conventional  use  as  money.  The 
belief  may  truly  be  said  to  be  universal,  although  in  some 
instances  opposed,  but  not  overcome,  by  the  extensive  use  of 
inconvertible  bank  and  government  notes.  Such  notes  are 
merely  units  of  valuation,  purchase,  and  payment,  and  their 
whole  value  lies  in  the  fact  that  they  will  exchange  for  units 
of  merchandise.  Such,  to  speak  with  rigorous  accuracy,  is 
and  necessarily  must  be  the  character  of  all  money,  because 
it  can  only  be  used  as  money  to  procure  other  things.  Hence 
the  intrinsic  qualities  of  the  metal,  in  the  shape  of  money, 
must  be  eliminated  in  an  analysis  of  money  and  its  uses. 
The  true  reason  why  metallic  money,  duly  distributed  with 
commodities  through  commerce,  is  the  steadiest  of  all  cur- 
rencies is  that  there  are  definite  limitations  to  its  manufact- 


DEVELOPMENT  OE  MONEY  AND  ITS  USES.  55 

ure  as  a  unit  of  value  in  the  metallic  material,  of  whicli  it  is 
composed,  while  the  prevailing  idea,  which  can  never  be 
subverted,  perhaps,  except  as  matter  of  science,  is  that  as 
money  its  intrinsic  qualities  give  it  a  value  as  a  commodity 
which  remains  in  it  and  cannot  be  separated  from  it,  even 
when  it  is  used  only  as  money.  The  prevailing  idea  is  right 
in  respect  to  the  fact  of  steadiness  of  metallic  money  in  ex- 
changeable value,  but  wrong  as  to  the  true  reason  for  it. 
The  true  reason  I  have  given  ;  the  popular  reason  is,  that 
the  unit  of  money  is  itself  in  the  shape  of  a  metallic  coin,  — 
a  valuable  commodity  at  the  moment  it  is  used,  —  and  that  it 
performs  its  valuing  function  as  a  commodity.  But  even 
this  erroneous  idea  itself,  as  will  be  hereafter  shown,  serves 
to  add  to  the  stability  of  prices  by  keeping  large  masses  in 
reserve,  to  be  put  to  actual  use  in  circulation  only  to  ex- 
change commodities. 


CHAPTER  II. 


THE    PEIMARY    CAUSE    OF    BANKING    AND  COMMERCIAL 
CRISES  EXPLAINED  UPON  AN  ENTIRELY  NEW  THEORY. 

By  Cause  I  mean  the  ultimate  and  efficient  cause,  with- 
out which  such  crises  could  never  occur  ;  and  as  there  could 
be  no  commerce,  and  therefore  no  civilization  ;  no  capitalists, 
and  no  banks,  and  therefore  neither  individual  nor  bank 
loans ;  no  production,  and  therefore  no  distribution  or  con- 
sumption, in  the  complex  sense  in  which  at  this  day  and  in 
these  United  States  we  understand  these  terms,  except 
through  men  as  the  actors  or  agents,  without  whom  the 
processes  which  these  terms  imply,  and  therefore  the  terms 
themselves,  would  never  have  existed ;  and  because  men 
themselves  are  impelled,  while  they  are  at  the  same  time  lim- 
ited, by  outward  conditions,  the  cause  of  commercial  and 
banking  crises  must  lie  either  in  the  men  or  the  outward 
conditions,  or  both.  What  is  the  cause,  and  is  it  curable 
or  incurable  ?  The  introductory  part  of  all  this  business 
is  production,  terminating  through  distribution  in  consump- 
tion, and  this,  and  therefore  the  disturbance  of  it,  is  coex- 
tensive with  the  country  itself. 

Men  have  always  been  compelled  at  every  stage  of  civil- 
ization to  provide  the  absolute  necessaries  of  life  as  the  in- 
exorable condition  precedent  to  providing  things  not  abso- 
lutely necessary  ;  and  as  they  progress  upward,  and  artificial 
wants  increase,  together  with  the  means  of  supplying  them, 
the  least  artificial,  because  found  in  the  largest  number,  will 
require  the  largest,  and  the  most  artificial,  because  found  in 
the  smallest  number,  will  require  the  least  amount  of  sup- 
ply to  satisfy  their  respective  wants.  All  want  the  common 
comforts  of  life,  and  nearly  all  are  able  to  procure  them  ;  all 


CAUSE  OF  BANKING  AND  COMMERCIAL  CRISES.  57 


want,  and  many  are  able  to  procure  the  means  of  gratify- 
ing some  of  the  more  artificial ;  and  all  want,  but  few  are 
able  to  obtain  the  means  of  satisfying  those  most  artificial. 
The  smaller  the  circle  of  consumers,  or  the  more  refined  and 
civilized  the  want,  the  greater  the  danger  of  loss  of  ability 
to  consume ;  a  danger  existing  in  the  highest  degree  in  the 
United  States.  The  terms  in  which  ideas  arising  from 
money  and  its  movements  are  expressed,  and  the  very  com- 
plex nature  of  money  itself  in  England  and  the  United 
States,  have  obscured  all  the  actual  movements  that  are 
behind  them.  The  comparative  safety  of  keeping  gold  and 
silver  instead  of  bank  paper ;  the  computation  of  riches  in 
money  ;  the  terms,  scarcity  of  money,  and  plenty  of  money, 
circulation,  expansion,  and  contraction,  have  disguised  the 
real  exchanges ;  the  auxiliary  exchange  has  concealed  the 
real  exchange  itself. 

Moreover,  to  investigate  and  comprehend  the  movement 
or  circulation  of  gold,  bank-notes,  or  bank  credits,  it  is  not 
sufficient  to  investigate  merely  the  facts  which  lie  behind 
"traffic,"  "trade,"  "over-trading,"  "speculation,"  etc.,  be- 
cause if  we  stop  there  we  shall  really  make  no  investigation 
at  all,  and  we  shall  leave  the  subject  with  ignorance  more 
profound  than  we  entered  upon  it.  We  must  ascend  the 
river  which  supplies  us  to  its  source ;  we  must  go  from 
"  traffic,"  which  we  must  henceforward  call  Distribution,  to 
its  source,  Production,  and  thence  down  to  Consumption,  — 
the  former,  ultimate  cause,  and  the  latter,  ultimate,  effect,  — 
otherwise  we  shall  have  no  science ;  because  science  con- 
sists in  tracing  and  discovering  cause  and  effect  as  far  as  we 
can  ;  and  I  affirm  that  the  term  distribution  —  when  we 
desire  to  use  a  general  term  —  is  more  proper  than  exchange, 
because  goods  are  not  directly  exchanged,  but  indirectly, 
through  money ;  in  other  words,  they  are  distributed 
through  the  agency  of  money.  Moreover,  the  word  is  less 
liable  to  mislead  us,  and  of  itself  implies  a  source  from 
which  distribution  is  rendered  possible.  Discarding  money 
for  the  present,  and  supposing,  instead  of  banks  and  capital- 
ists making  it  their  business  to  loan  money,  banks  and  cap- 


58 


POLITICAL  ECONOMY. 


italists  making  it  their  business  to  sell  their  written  promises 
to  manufacturers  and  merchants,  by  which  they  promise  to 
pay  on  demand,  to  them  or  to  bearer,  certain  quantities  of 
staple  commodities,  or,  should  they  prefer  it,  an  equivalent 
in  other  commodities,  writing  these  promises  in  as  small 
amounts  as  desired,  for  convenience  in  paying  wages,  —  can 
any  overstock  or  redundant  production  arise  from  these 
loans  ?  The  answer  to  this  question  is  in  what  follows  :  Of 
the  absolute  necessaries,  of  grain  and  provisions,  there  can 
be  no  redundancy,  for  that  proposition  is  demonstrated  by 
the  facts  of  all  past  time.  There  may  be  in  some  localities 
a  glut,  arising  from  inability  to  get  to  a  market ;  there  may 
be  at  times  too  large  quantities  thrown  upon  the  market 
at  once,  where  the  whole  produce  is  bought  within  a  short 
time,  instead  of  keeping  a  part  of  it  where,  for  the  good 
of  all,  it  properly  belongs,  in  the  hands  of  the  producers 
until  wanted ;  there  may  be  high,  to  be  followed  perhaps 
by  low,  prices  ;  but  there  can  be  on  the  average,  in  this  part 
of  the  field,  no  overproduction  ;  because  if  there  is  not  a 
market  at  home  for  a  surplus,  there  is  abroad.  But  while 
there  can  be  no  overproduction  of  absolute  necessaries,  can 
there  be  any  overproduction  of  articles  which  are  not  abso- 
lute necessaries,  on  a  national  scale.  There  certainly  can  ; 
especially  in  those  articles  having  the  smallest  class  of  con- 
sumers, unless  four  cofactors,  which  will  follow  the  overpro- 
duction, shall  immediately  arrest  its  progress.  These  four 
cofactors  are :  1st,  the  law  which  makes  all  commodities  less 
and  less  valuable  as  they  increase  in  quantity,  unless  the  in- 
crease is  consumed  as  fast  as  it  is  produced,  the  demand 
keeping  up  with  the  supply ;  2d,  the  progressive  loss  of  cap- 
ital, from  inability  to  reinvest,  because  it  is  locked  up  in  the 
overstock ;  3d,  the  increased  rate  of  interest  arising  from  in- 
creasing scarcity  of  loans,  and  the  increased  risk  to  capital- 
ists and  bankers ;  4th,  more  than  all,  the  increased  price  of 
the  necessaries  of  life  bought  on  credit.  These  four  cofac- 
tors will  make  overproduction  to  an  extent  sufficient  to 
bring  on  an  industrial  crisis  impossible,  because  they  will 
make  the  conditions  preceding  it  impossible. 


CAUSE  OF  BANKING  AND  COMMERCIAL  CRISES.  59 


But  granting  that  it  is  possible  to  carry  the  overproduc- 
tion so  far  as  to  produce  such  a  crisis,  the  possibility,  and  so 
the  overproduction  itself,  can  arise  only  by  neutralizing  or 
masking  the  operation  of  these  cofactors  by  giving  some  new 
and  additional  qualities  to  their  immediate  cause,  which  is 
credit,  or  by  exchanging  it  for  something  else.  Hence,  to 
disguise  the  legitimate  operation  of  these  cofactors,  personal 
credit  must  be  masked  by  exchanging  it  for  or  converting  it 
into  something  else,  because  it  is  impossible  to  give  any  new 
qualities  to  credit.  I  am  still  supposing  a  state  of  civiliza- 
tion and  production  like  that  of  the  present  day  to  exist,  and 
that  all  exchanges  are  made,  both  directly  between  produc- 
ers and  consumers,  and  mediately  through  merchants  and 
traders,  by  the  aid  of  bankers'  and  capitalists'  written  prom- 
ises in  the  form  supposed,  because  in  this  way  I  remove  the 
veil  placed  upon  the  whole  movement  of  production,  distri- 
bution, and  consumption,  by  money  and  its  terms.  It  is 
manifest  now  that  the  main  business  of  this  civilized  so- 
ciety consists  in  producing  and  distributing  the  results  of 
labor  and  capital  in  a  tangible  shape.  All  paper  documents 
in  the  shape  of  deeds,  bonds,  mortgages,  stock  certificates, 
debentures  of  all  kinds,  bills,  and  notes,  are  but  the  evidence 
of  title  in  the  real  owners  and  holders  of  the  capital,  but  do 
not  constitute  the  capital  itself.  Inasmuch  as  they  serve  to 
divide  the  capital  up  into  as  small  portions  as  may  be  neces- 
sary, they  in  effect  render  the  whole  and  every  part  of  the 
capital  more  readily  salable  and  transferable  ;  and  thus, 
while  not  capital,  they  add  greatly  to  its  efficiency. 

I  will  now,  for  the  purpose  of  clearing  the  way  to  the  so- 
lution of  the  main  question,  — What  is  the  cause  of  industrial 
and  banking  crises  ?  —  suppose  bankers'  tokens,  equal  in 
value  by  common  consent  and  by  actual  redemption  on  the 
part  of  bankers  to  the  former  promises,  to  be  issued,  and 
their  written  promises  to  furnish  commodities  retired.  So 
long  as  they  are  mere  tokens,  and  are  regularly  redeemed 
in  commodities  as  fast  as  they  have  been  used  in  payment 
for  labor  and  materials,  it  is  in  effect  the  old  promise  to  pay 
in  commodities,  and  there  can  be  therefore  no  great  expan- 


60 


POLITICAL  ECONOMY. 


sion  of  production  beyond  consumption,  because  there  is 
nothing  to  neutralize  the  operation  of  the  four  cofactors ; 
but  let  the  idea  of  measuring  values  in  the  terms  of  the 
tokens  taken  as  so  many  units  of  universal  value  in  exchange 
supersede  the  old  mode  as  it  naturally  would,  and  we  have 
money  ;  and  we  can  thus  easily  have  an  overstock  of  money 
in  these  tokens.  The  tokens  are  paid  out,  and  are  received 
back ;  they  are  loaned  only  to  pay  for  labor  and  materials. 
As  they  are  paid  out  and  their  volume  expands,  production 
expands  with  them  ;  and  as  they  are  paid  back  their  vol- 
ume is  contracted,  and  production  contracts  in  like  manner. 
After  a  time  production  expands  together,  and  in  exact  pro- 
portion, with  the  volume  of  tokens  in  excess  of  consumption 
and  contraction,  and  for  every  token's  worth  of  the  excess 
there  is  one  token  outstanding  and  not  retired,  or,  as  it  might 
be  said  with  equal  truth,  calling  the  token  a  dollar,  for  every 
dollar's  worth  of  the  excess  of  unconsumed  goods  a  dollar 
has  been  put  in  circulation  ;  and  this  is  certainly  an  enor- 
mous expansion  of  tokens  or  dollars,  whichever  we  choose 
to  call  them.  Now  it  is  quite  certain  that  the  banker  is 
lowering  the  exchangeable  value  of  his  tokens,  otherwise 
called  dollars,  for  himself,  and  the  capitalist,  as  well  as  the 
producer,  the  distributor,  and  the  consumer.  The  producer 
gains  at  every  issue  of  tokens,  whether  to  himself  or  another 
producer,  in  the  rising  price  of  his  commodities,  and  in  that 
only.  So  far  as  he  and  his  laborers  consume  other  produce, 
however,  they  are  losers  as  well  as  the  banker  and  capital- 
ist ;  but  while  the  commodity  he  produces  rises  for  a  time, 
with  everything  else,  there  is  an  appearance  of  profit  in 
every  sale  he  makes,  which  masks,  by  apparently  suspending, 
the  operation  of  the  four  cofactors  ;  the  loss  by  depreciation 
is  locked  up  for  the  present,  and  disguised  in  the  overstock, 
and  sooner  or  later  comes  the  industrial  and  banking  crisis. 
There  is  but  one  crisis,  and  it  has  an  industrial  as  well  as 
a  banking  side. 


CAUSE  OF  BANKING  AND  COMMERCIAL  CRISES.  61 


COMMERCIAL  AND  POPULAR  TERMS  THAT  HELP  TO  DIS- 
GUISE THE  TRUTH. 

There  are  commercial  terms  which  hide  the  truth  and 
prevent  our  seeing  realities.  "  Overtrading  "  is  a  favorite 
one,  and  conceals  the  truth  by  assuring  us  that  the  mischief 
has  come  from  trading  too  much,  when  in  point  of  fact  it 
comes  from  inability  to  trade,  and  thus  to  get  rid  of  an  over- 
stock by  means  of  trade  ;  for  the  object  of  trade  is  to  bring 
producer  and  consumer  together,  and  there  is  an  inability  by 
means  of  trade  to  make  people  consume  beyond  their  capac- 
ity. "  Overtrading  "  is  in  its  true  sense  a  term  of  local  ap- 
plication only.  Certain  merchants  or  adventurers  attempt 
to  control  prices  and  sell  at  a  profit,  by  buying  up  all  the 
produce  (especially  if  an  article  of  foreign  production)  and 
disposing  of  it  before  the  market  can  obtain  adequate  sup- 
plies from  abroad  —  a  speculation  occasionally  successful ; 
but,  if  unsuccessful,  it  does  not  produce  an  industrial  crisis. 
Again,  where  an  industrial  and  banking  crisis  occurs,  and 
stocks  of  merchants  as  well  as  producers  are  thrown  upon 
the  market  at  ruinously  low  prices,  the  merchants  involved 
could  never  have  been  guilty  of  overtrading  had  there  not 
existed  an  antecedent  cause  in  overproduction  ;  they  have 
been  selhng  all  the  time  at  a  profit,  because  the  actual  loss 
in  value  was  masked  in  price.  The  real  depreciation  was 
disguised  in  the  apparent  profits  yet  lying  in  the  stock  but 
not  actually  realized  ;  actual  depreciation  existing  in  their 
stock  took  the  guise  of  a  profit  in  price  to  be  realized  on 
future  sales. 

Again,  there  is  a  falsehood  locked  up  in  the  popular  word 
*'  speculation,"  when  applied  to  the  facts  of  an  industrial  and 
banking  crisis.  There  have  been,  it  is  true,  speculations  in 
constructing  railroads,  an  excess  of  speculation  in  stocks,  and 
speculations  in  real  estate,  but  the  cause,  the  origin  of  the 
speculation,  has  been  an  expansion  of  circulation,  causing  an 
expansion  of  production,  where  the  expansion  comes  through 
bank  loans  ;  for  I  am  not  now  referring  to  government  issues. 
The  industrial  and  banking  crisis  is  on  a  national  scale,  and 


62 


POLITICAL  ECONOMY. 


the  chief  business  of  civilized  man  in  respect  to  wealth  is  to 
produce,  distribute,  and  consume.  Progressive  expansion  of 
prices  of  the  fruits  of  capital  must  arise  before  expansion  of 
prices  of  capital.  Advancing  prices  of  merchandise  cause 
active  trade,  active  trade  activity  of  passenger  and  freight 
traffic,  advancing  prices  in  railroad  stocks,  advancing  rents, 
and  so  advancing  improvements,  and  therefore  prices  of  real 
estate ;  and  the  latter  speculation  may  be  and  is  carried  to 
an  excess  unwarranted  even  by  any  advance  of  prices. 
Profitable  or  seemingly  profitable  trade,  following  apparently 
profitable  and  excessive  production,  draws  population  to 
towns  and  cities,  and  attracts  men  from  agricultural  pursuits. 
There  may  be,  it  is  true,  an  occasional  mania  of  speculation 
that  will  break  out  in  some  quarter  or  other,  by  means  of 
credit  or  without  it,  in  real  estate  or  in  something  else,  and 
the  tulip  mania  in  Holland  is  an  instance  ;  yet  this  is  en- 
tirely different  from  an  industrial  and  banking  crisis. 

But,  in  the  case  I  have  supposed,  the  excessive  use  of 
tokens  at  last  brings  on  a  crisis.  What  is  the  result  ?  Ex- 
tensive bankruptcies  of  banks,  and  still  more  of  merchants, 
manufacturers,  railroad  contractors  and  builders,  sacrifice  of 
stock,  and  that  phase  of  the  crisis  which  is  peculiarly  indus- 
trial, the  discharge  of  large  numbers  of  laborers.  There  is 
apparently  actual  abundance  of  provisions,  as  well  as  goods, 
and  there  is  an  exuberance  of  production  in  certain  quarters, 
as  there  was  in  the  United  States  in  1873.  There  is  cer- 
tainly nothing  actually  wrong,  says  the  ordinary  observer, 
and  the  "  panic  "  ought  not  to  have  happened^  and  ruined 
business  in  this  way.  The  common  observer  has,  from  his 
point  of  view,  a  great  deal  of  common  sense  on  his  side ;  and 
wherein  lies  his  mistake,  inasmuch  as  he  perceives  that  there 
is  abundance  and  more  than  abundance  ?  He  insists,  there- 
fore, that  if  the  "panic"  could  have  been  prevented  nothing 
could  have  occurred  to  mar  the  happy  state  of  trade  and 
banking.  Another  observer  insists  that  if  the  banks  had 
consented  to  loan  more  money,  instead  of  actually  contract- 
ing it  by  calling  in  loans,  or  if  the  Treasury  had  only  pos- 
sessed and  exercised  the  power  of  issuing  notes,  there  would 


C^USE  OF  BANKING  AND  COMMERCIAL  CRISES.  63 


have  been  no  panic  and  so  no  crisis.  There  is  an  abundance, 
say  both  these  observers,  of  money  as  well  as  goods,  and  if 
the  banks  had  loaned  freely,  instead  of  contractiDg  sharply, 
goods  could  have  been  held  and  prices  sustained.  This 
reasoning  is  apparently  correct,  but  there  is  a  fallacy  in  the 
premises.  The  panic  is  not  the  cause,  but  only  an  incident 
in  the  series  of  results ;  and  because  not  a  necessary  incident 
to  the  main  result  it  might  never  occur.  England  is  now  in 
one  stage  of  an  industrial  and  banking  crisis  which  has  not 
been  attended  by  panic,  but  she  suffered  from  a  panic  in  the 
crisis  of  1866,  as  did  the  United  States  from  the  panic  which 
attended  the  crisis  of  1873.  Assuming,  however,  that  a 
crisis  can  be  avoided,  provided  a  panic  can  be  avoided,  these 
reasoners  are  right,  because  a  panic,  if  threatened,  may 
in  all  probability  be  postponed  —  and  possibly  avoided  alto- 
gether —  by  free  loans  in  bank,  or  free  government  issues, 
under  the  present  banking  systems  of  England  and  the 
United  States,  either  with  convertible  bank-notes  or  incon- 
vertible bank-notes,  for  reasons  appearing  in  the  chapters  on 
Banking  in  the  United  States,  and  Banking  in  England. 
Had  the  banks  of  the  United  States,  and  especially  the  banks 
of  New  York,  refrained  from  forcing  their  customers  to  pay 
up  at  such  short  notice,  the  panic  of  1857,  as  respects  New 
York  city,  would  have  been,  perhaps,  postponed,  and  possi- 
bly a  panic  there  might  not  have  occurred  at  all,  inasmuch  as 
producers  and  merchants  would  thus  have  been  enabled  to 
hold  the  stock  on  hand  for  a  time  longer.  The  four  cofac- 
tors  had  been,  however,  for  some  time  in  vigorous  operation, 
as  shown  in  the  high  rates  of  interest,  high  prices  of  neces- 
saries, difficulty  of  making  new  loans,  derangement  of  the 
"exchanges"  between  New  York  and  the  West  through 
depreciated  bank-notes,  and  "  balance  of  trade "  largely 
against  the  interior.  Possibly  a  bank  panic  might  thus  have 
been  avoided  in  New  York  city,  but  the  four  cofactors  had 
already  brought  on  the  industrial  and  banking  crisis  upon  a 
national  scale,  for  that  was  unavoidable. 

Now  the  lesson  to  be  learned  here  is,  that  the  overproduc- 
tion of  commodities  not  absolutely  necessary  to  existence,  but 


64 


POLITICAL  ECONOMY. 


nevertheless  absolutely  necessary  to  civilization  and  human 
progress,  is  not  possible  by  the  use  of  even  a  banker's  guar- 
anty in  the  shape  of  a  promise  to  pay  in  the  necessaries  of 
life,  or  in  the  shape  of  a  token  taken  in  lieu,  or  as  a  repre- 
sentative, or  as  evidence  of  the  promise,  so  long  as  it  is  spe- 
cifically performed  all  the  time  as  a  contract ;  and  we  shall 
see  by  and  by  that  the  result  would  be  the  same  if  the 
banker  had  adopted  for  his  token  a  metal  like  gold,  or  even 
copper,  if  the  tokens  were  made  proportionally  heavy,  and 
deposited,  say  with  government,  and  subsidiary  tokens  is- 
sued for  the  deposit.  Suppose  the  material  to  be  gold,  which 
already  has  a  considerable  value  in  the  line  of  manufactures 
and  arts.  As  the  tokens  come  into  use,  and  gradually  into 
universal  circulation,  their  value  increases  by  the  new  use  to 
which  gold  has  been  put,  and  the  latter  acts  with  the  old  use 
as  a  coefficient  in  creating  a  demand  for  the  metal,  which 
rises  in  value,  and  the  tokens  are  made  smaller  as  the  value 
increases,  and  until  it  becomes  stationary.  To  furnish  the 
gold  token  costs  as  much  as  to  fulfill  the  old  promises,  because 
there  can  be  no  overproduction  of  the  tokens,  and  hence 
the  banker  cannot  continue  to  purchase  the  gold  unless  his 
customers  pay  him ;  and  therefore  they  can  only  get  neces- 
saries by  selling  as  fast  as  they  produce,  because  in  case  of 
excess  their  goods  not  only  depreciate,  but  they  cannot  buy 
necessaries,  inasmuch  as  their  capital  is  locked  up. 

Now  it  is  important,  if  we  are  to  arrive  at  any  true  sci- 
ence upon  this  subject,  to  give  true  and  not  false  reasons, 
even  for  correct  opinions.  The  prevailing  idea  among  the 
bullion  theorists  is,  that  gold  makes  the  best  money  because 
it  has  intrinsic  value  recognized  everywhere,  and  it  is  good 
everywhere.  The  fact  that  it  is  good  all  over  the  world  is 
only  one  of  the  causes  which  produce  that  final  result  which 
makes  it  the  best  material  for  money. 

The  universal  demand  for  it,  to  coin  and  to  manufacture, 
has  caused  such  a  large  accumulation  of  it  that  the  ratio  of 
the  annual  product  to  the  total  mass  is  small,  and  neces- 
sarily, therefore,  growing  smaller  unless  the  annual  product 
increases  as  rapidly  as  the  increasing  mass.    Whether  the 


CAUSE  OF  BANKING  AND  COMMERCIAL  CRISES.  65 


general  use  of  silver  by  all  governments  as  coin,  without  any 
limitation  of  amount,  might  possibly  be  desirable  (provided 
always  that  all  governments  would  take  the  responsibility  of 
keeping  silver  coin  and  bullion  on  account  of  its  great  rela- 
tive weight  and  bulk,  and  issuing  tokens  for  the  deposit),  is 
a  matter  to  be  discussed  in  a  monetary  convention  of  all 
nations.  Whether  it  would  be  desirable  depends  entirely 
upon  the  question,  whether  the  annual  product  of  the  two 
metals,  with  the  greatly  increased  value  given  to  silver  by  its 
general  use  as  coin,  would  be  more  likely  tlian  that  of  gold 
alone  to  increase  in  harmony  with  the  annual  increase  of 
production  and  distribution  —  in  other  words,  commerce. 
Nevertheless,  for  all  practical  purposes,  we  may  safely  say 
that  the  supposed  accumulation  of  gold  for  the  last  twenty- 
five  years  in  excess  of  commerce  is  imaginary;  gold  has 
cheapened  more  by  the  relative  increase  of  banks,  and  possi- 
bly greater  activity  of  production  in  that  period,  than  it  has 
by  the  accumulation.  We  may  say,  then,  that  there  can  be 
no  overproduction  of  gold,  any  more  than  there  can  be  of 
necessaries  ;  and  as  shown  with  regard  to  the  latter  in  a 
former  chapter,  so  we  may  say  of  gold,  that  its  production 
cannot  be  carried  above  the  base  line  of  agricultural  produc- 
tion of  necessaries ;  and  therefore  if  gold,  or  tokens  converti- 
ble into  gold  as  fast  as  production  takes  place,  be  used  to 
measure  values  created  to  satisfy  any  wants  beyond  neces- 
saries, the  production  of  the  latter  cannot  be  carried  beyond 
or  in  excess  of  such  agricultural  production. 

Gold  coin  or  tokens,  or  paper  (for  instance  paper  dollar) 
convertible,  —  and  not  only  convertible,  but  actually  con- 
verted into  gold,  —  as  soon  as  it  has  performed  its  only  le- 
gitimate office  of  stimulating  production  by  paying  for  labor 
and  material,  and,  in  the  next  place,  by  one  payment  more 
furnishing  the  laborer  and  producer  with  necessaries,  savings, 
and  raw  material  increased  by  profits,  will  always  keep  pro- 
duction and  consumption  near  together  ;  and  if  the  produc- 
tion of  articles  not  necessaries  could  never  be  in  excess  of 
the  production  of  necessaries,  a  token  circulation,  and  by 
paiity  of  reason  bank-notes  if  issued  by  banks  only,  and  not 
5 


66 


POLITICAL  ECONOMY. 


by  governments,  never  could  be  in  excess  so  long  as  loans 
were  confined  to  producers  and  merchants. 

I  pass  now  to  the  consideration  of  the  subordinate,  or 
what  may  be  called  the  post-auxiliary,  causes  which  acceler- 
ate and  magnify  industrial  and  commercial  crises. 

The  primary  cause  is  the  non-redemption  in  gold  of  bank 
liabilities  arising  either  from  book  or  note  as  soon  as  they 
have  performed  their  only  legitimate  office.  The  consumer 
pays,  otherwise  he  could  not  consume ;  the  money  expan- 
sion, therefore,  represents  the  overstock  that  cannot  be  sold 
to  consumers.  The  difference  between  expansion  of  circula- 
tion in  harmony  with  expansion  of  production,  and  inflation 
of  circulation  by  government  issues,  like  legal  tender  notes  ; 
currency  issued  by  States  and  called  in  the  constitution  of 
the  United  States  bills  of  credit ;  the  old  Continental  scrip ; 
French  assignats ;  the  notes  of  the  Agricultural  Banks 
issued  in  large  amounts  in  Michigan,  1838-9,  to  provide 
the  people  of  that  State  a  safe  currency ;  and  finally  the 
issues  of  the  Free  Banks  of  Indiana  and  Illinois  (which  did 
not  belie  the  name  of  the  banks,  for  the  issues  were  free 
indeed),  I  have  clearly  pointed  out  in  another  chapter.  I 
refer  now  particularly  to  loans  made  for  what  bankers  would 
call  legitimate  business,  for  the  purposes  of  production,  dis- 
tribution, and  consumption.  No  doubt  a  bank  might  make 
a  loan  of  its  credit,  in  the  shape  of  convertible  notes,  or  on 
its  books,  to  be  used  by  the  borrower  in  the  purchase  of  capi- 
tal, for  instance  a  farm,  a  quantity  of  railroad  or  other  cor- 
poration stocks  or  debentures  ;  and  if  the  money  were  used, 
as  it  usually  is  for  these  purposes  only^  and  the  loans  paid 
back,  even  where  a  "  stock  speculation  "  has  intervened,  no 
expansion  of  circulation  in  the  sense  in  which  I  use  the 
term,  in  this  and  other  chapters,  has  occurred,  because  the 
expansion  arising  even  from  a  stock  speculation  is  short- 
lived, and  is  speedily  retired ;  but  where  the  loans  have 
been  used  to  pay  out  either  bank-notes  or  bank  credits  by 
means  of  checks,  for  labor  and  materials  resulting  in  a  new 
product,  and  hence  new  value  in  addition  to  all  the  values  in 
the  country  existing  before,  this  expansion  of  circulation, 


CAUSE  OF  BANKING  AND  COMMERCIAL  CRISES.  67 


which  has  caused  an  equivalent  expansion  of  values,  can 
never  be  retired  except  by  an  equivalent  contraction  which 
results  from  sales  for  cash  and  which  puts  the  borrowers  in 
the  way  of  paying  their  loans. 

This  is  usually  the  index  and  the  guaranty  that  an  equiva- 
lent consumption,  and  thus  contraction  of  values,  is  about  to 
take  place. 

WHAT  ARE  THE  POST- AUXILIARY  CAUSES  WHICH  AC- 
CELERATE AND  MAGNIFY  INDUSTRIAL  AND  COMMERCIAL 
CRISES  ? 

I  have  demonstrated  that  the  ultimate  cause  of  industrial 
and  banking  crises  is  the  masking  of  the  four  cofactors,  — 
inability  to  make  sales,  resulting  in  loss  of  profits  of  capi- 
tal ;  depreciation  of  goods  from  overstock ;  rise  of  rates  of  in- 
terest in  favor  of  bankers  by  reason  of  an  increase  of  their 
own  liabilities  and  risk  through  non-payment  of  loans,  re- 
sulting in  scarcity  of  money  to  loan  ;  and  the  relative  in- 
crease in  the  prices  of  necessaries  in  which  there  is  no  over- 
stock; and  the  first  of  these  cofactors  has  a  negative,  the 
remainder  a  positive  operation.  If  any  one  of  the  neces- 
saries, like  wheat,  has  its  relative  value  reduced  through 
the  influence  of  a  foreign  market,  the  difference  is  made 
up  in  other  necessaries.  Overstock  of  all  sorts  of  domestic 
goods  being  the  result,  when  the  crisis  comes,  as  come  it 
surely  must,  laborers  are  thrown  out  of  employment ;  and 
as  they  must  have  the  absolute  necessaries  of  life  before  all 
other  necessaries,  they  must  largely  devote  themselves  to 
other  occupations  which  will  furnish  these,  either  by  becom- 
ing farm  laborers,  purchasers  of  land,  or  at  least  laborers  in 
the  production  of  articles  more  necessary  and  therefore  hav- 
ing a  more  extensive  market  than  those  in  the  manufacture 
of  which  they  have  been  previously  engaged.  They  inten- 
sify the  glut  by  their  enforced  economy  in  the  use  of  the  lat- 
ter kind  of  articles.  The  overstock,  moreover,  has  been  in- 
creased, notwithstanding  the  signs  of  the  timee  preceding  a 
crisis,  because  it  has  been  absolutely  a  moral  impossibility 
on  the  part  of  any  one  manufacturer  or  merchant  to  stop  or 


68 


POLITICAL  ECONOMY. 


retire ;  and  so  the  chances  are  in  favor  of  large  capital  and 
exceptional  sagacity  and  force ;  and  the  two  latter  qualities 
appear  largely  in  adapting  the  qualities  of  goods  to  the  taste 
of  consumers,  and  in  bringing  goods  to  their  notice.  It  is 
therefore  a  question  of  chances,  when  viewed  as  a  whole, 
who  will  or  will  not  become  bankrupt.  This  inability  to 
stop  the  wheels  of  excessive  production  is  a  post-auxiliary 
cause,  coming  into  operation  through  the  primary  cause,  and 
is  on  the  negative  side.  Another  cause  is  the  progres- 
sive improvement  in  machinery,  economizing  hand  labor. 
This  cause  is  not  post-auxiliary  in  the  sense  that  the  primary 
cause  necessarily  precedes  it,  for  it  does  not ;  but  it  is  post- 
auxiliary  in  the  sense  that  without  the  existence  of  the 
primary  cause  it  never  could,  with  the  aid  of  all  other 
causes,  bring  on  a  crisis.  We  must  not  lose  sight  of  the 
fact  that  the  question  is  not.  How  many  hands  more  or  less 
will  it  take  to  produce  the  articles  not  absolutely  necessary  ? 
but.  How  many  hands  can  be  set  at  work  in  this  production, 
and  be  enabled  to  cause  such  exchanges  to  take  place  as  will 
give  them  and  their  employers  a  living  ?  It  must  not  be 
forgotten  that  the  business  of  society,  aside  from  the  time 
given  to  mental  occupation,  consists  not  only  in  producing 
but  exchanging,  and  the  net  annual  gains  after  the  produce 
has  been  exchanged  directly,  or  distributed  by  the  agency  of 
money,  are  small,  after  making  good  the  waste  and  deterio- 
ration of  capital.  If  there  be  an  excess,  therefore,  of  one 
commodity,  relatively  to  another,  "  the  exchanges  "  are  ad- 
verse to  somebody,  and  the  "  balance  of  trade  "is  in  favor 
of  somebody.  The  "balance  of  trade,"  for  instance,  was 
in  favor  of  New  York  and  against  the  West  in  1857,  not 
only  on  account  of  depreciated  bank-notes  like  those  of  the 
free  banks,  but  because  labor  had  been  expended  on  rail- 
roads by  the  aid  of  bank-notes,  and  the  result  of  the  labor- 
er's work  in  the  shape  of  shares  and  debentures  of,  or  claims 
against,  the  railroads,  would  not  bring  cash :  "  the  ex- 
changes" between  the  West  and  East  were  partially  blocked. 
But  there  is  another  cause  which  increases  and  is  itself  in- 
creased by  the  primary  cause,  which  masks  actual  and  inher- 


CAUSE  OF  BANKING  AND  COMMERCIAL  CRISES.  69 


ent  depreciation  in  the  guise  of  a  phantom  of  advancing 
prices.  It  is  the  intelligence,  the  enterprise,  and  the  intense 
desire  to  improve  their  condition  in  life,  and  at  the  same  time 
the  pride  of  reaching  and  maintaining  a  certain  condition, 
on  the  part  of  our  people,  and  hence  the  greater  necessity  of 
the  metallic  check  to  keep  their  youthful  energy  from  over- 
leaping itself. 

Another  post-auxiliary  cause  of  great  efficacy  is  the  na- 
tional habit  or  tendency  to  move  in  this  cycle  of  maximum 
and  minimum  production,  which  grows  by  what  it  feeds  on  ; 
that  is  to  say,  bank  loans.  The  difference  between  our  na- 
tional habits  and  those  of  the  people  of  France  are  manifest. 
France  has  a  stable  currency  and  a  corresponding  stability 
of  commercial  and  productive  character,  but,  on  the  other 
hand,  from  deep-seated  moral  and  political  causes,  has  been 
a  prey  to  political  action  and  reaction,  that  is  to  say,  revolu- 
tion. The  United  States,  with  deep-seated  political  conser- 
vatism and  stability,  in  spite  of  the  ravages  of  party  upon 
their  liberties,  are  subject  to  action  and  reaction  from  ex- 
tremes, that  is  to  say,  to  revolution,  in  their  financial  and  in- 
dustrial affairs.  The  cause  has  been  stated,  and  if  that  cause 
were  removed,  in  all  probability  there  would  be  a  strong  ten- 
dency to  maintain  overproduction  by  means  of  personal 
credit ;  but  to  carry  it  to  an  extent  sufficient  to  produce  an 
industrial  crisis  would  be  scarcely  possible. 

But  it  has  been  asserted  that  tariffs  and  taxes  have  done 
much  towards  the  overstock.  I  grant  that  they  have  done 
something  towards  the  overstock,  and  I  think  they  have  done 
it  by  impairing  the  ability  to  exchange  productions,  between 
the  manufacturers  and  the  agriculturists,  and  therefore  be- 
tween the  manufacturers  themselves.  The  office-holders,  the 
army  and  navy,  and  the  government  debt  holders,  at  home 
and  abroad,  so  far  as  they  draw  upon  the  government,  draw 
most  upon  those  who  are  at  the  base  line  of  necessaries,  and 
the  draft  is  honored  by  means  of  tariffs  and  taxes :  the  larger 
the  draft,  the  less  remains  to  maintain  the  equilibrium  of  the 
exchanges  between  the  immovable  base  line  and  the  mov- 
ing line  of  non-necessaries ;  or,  to  put  it  in  plainer  terms, 


70 


POLITICAL  ECONOMY. 


inasmuch  as  all  taxes  fall  most  heavily  upon  land,  the  more 
land  is  taxed,  —  waiving  for  the  present  the  question,  whether 
and  how  far  this  taxation  reacts  upon  all  other  production,  — 
so  much  the  less  has  land  left  to  exchange  for  relative  neces- 
saries ;  or,  to  put  it  in  homely  phrase,  if  a  farmer,  whom  I 
bring  forward  as  the  representative  of  his  class,  pays  in  the 
purchases  he  makes  one  fifth  of  his  crop  product,  in  the 
shape  of  an  increased  price  of  what  he  consumes,  his  ability 
to  buy  of  the  merchant,  that  is  to  say  of  the  manufacturer, 
is  reduced  by  one  fifth.  This  is  a  post-auxiliary  cause  only 
in  the  sense  that  it  accelerates  the  advent  of  an  industrial 
crisis,  makes  it  more  intense,  and  delays  the  reaction  by  de- 
laying the  restoration  of  the  exchanges  between  the  two 
classes  of  producers. 

WHAT  ARB   THE   CONSEQUENCES  OF  AN  INDUSTRIAL  AND 
BANKING  CRISIS? 

The  absolute  necessaries  of  life  are  abundant  where  there 
is  a  large  surplus  after  all  the  inhabitants  of  a  country  are 
fed.  How  then,  asks  a  banker,  a  merchant,  a  cloth  or  iron 
manufacturer,  railroad  builder  or  laborer,  could  a  crisis  have 
occurred,  if  the  banks  that  supply  all  the  loans  had  agreed  to 
stand,  and  had  actually  stood  by  us  ?  I  answer  again,  that 
although  there  may  be  apparently  actual  abundance,  yet 
every  man,  in  this  universal  system  of  exchanges,  must  him- 
self have  something,  not  only  to  offer,  but  something  that 
will  be  taken  in  exchange,  before  he  can  eat ;  and  the  result 
of  his  inability  to  make  such  an  exchange  carries  him,  or 
some  one  else  in  his  place  and  stead,  either  to  the  base  line 
of  agriculture,  whence  the  supplies  come,  or  to  some  point 
on  the  road  towards  it.  In  the  mean  time,  production  of 
articles  not  absolutely  necessary  continues  to  diminish  with 
diminishing  consumption,  until  by  the  necessary  and  inher- 
ent law  of  all  action  and  reaction  it  falls  as  much  below  as 
it  had  been  before  above  average.  Agriculture  is  then  no 
longer  in  the  ascendant,  and  the  manufacturers  of  England 
and  the  United  States  have  at  last  touched  the  lowest  point 
in  the  descending  scale  of  quantity  and  price,  which  have 


CAUSE  OF  BANKING  AND  COMMERCIAL  CRISES.  71 


contracted  in  harmony,  and  having  remained  there  for  a 
time,  begin  to  reascend ;  the  expansion  of  production  to 
meet  increasing  demand  is  fed  by  a  corresponding  expan- 
sion of  circulation  through  the  old  and  ordinary  agency  of 
bank  loans,  to  run  the  same  cycle  again  ;  and  the  crisis 
comes  at  last,  as  it  came  before.  The  movement  of  produc- 
tion in  England  and  the  United  States,  above  and  below  the 
base  line  of  absolute  necessaries,  and  of  gold  and  bank-notes 
convertible  and  actually  converted  in  time  to  check  overpro- 
duction, may  be  represented  by  a  curve  passing  above  and 
below  the  line.    Thus  the  upward  movement  above  the  base 


F 


G 


line  A  B  begins  at  C,  proceeds  upward  to  F,  and  then  passes 
the  base  line  at  D,  until  in  its  downward  progress  it  stops  at 
G,  and  finally  ascends  through  the  base  line  at  E  and  com- 
pletes the  cycle  at  H.  The  production  of  relative  neces- 
saries, instead  of  moving  in  the  same  plane  or  on  the  same 
base  line  with  necessaries,  is,  by  the  aid  of  bank  expansion, 
itself  carried  above  that  line,  only  to  be  carried  afterwards 
as  much  below  it.  We  may  describe  agriculture,  therefore, 
as  the  base  line,  which  is  immovable,  and  the  specie  line  (or 
convertible  bank-note  line  as  it  existed  with  the  Scotch 
banks  in  Adam  Smith's  time)  as  coinciding  with  it ;  while 
under  the  inconvertible  bank-note  line,  or  the  imperfectly 
convertible  bank-note  line  existing  in  the  United  States 
even  with  "  specie  payments,"  as  explained  in  the  chapter  on 
American  Banking,  the  movement  upward  of  expanding 
production  through  the  aid  of  bank  loans,  and  the  corre- 
sponding movement  downwards  in  spite  of  all  that  bank 
loans  can  do,  must  renew  their  cycle  through  the  delayed  and 
therefore  intensified  action  of  the  four  cofactors,  upwards 
and  downwards  indefinitely.  But  what  has  the  agriculturist 
to  say  to  all  this  disturbance  of  the  "  exchanges,"  or  what 
have  his  friends  to  say  for  him?    It  has  been  said  that 


72 


POLITICAL  ECONOMY. 


he  is  abused,  but  he  seems  to  have  greatly  the  advantage. 
His  produce  rose  to  as  high,  or  higher  figures  than  the  man- 
ufactured goods  he  bought,  except  only  in  the  period  last 
mentioned,  when  the  goods  had  reached  the  lowest  figures, 
in  quantity  and  price,  and  were  rising  ;  but  he  has  been 
compensated  for  this,  and  more  than  compensated,  by  the 
very  low  prices  which  the  goods  brought  while  forced  sales 
were  going  on.  But  says  a  theorist,  who  has  a  theory  that 
gold  is  good  for  money  only  because  it  has  "  intrinsic 
value,"  right  as  he  is  in  his  opinion,  but  wrong  in  his  rea- 
son :  Did  not  the  agriculturist  who  sold  his  wheat  for  one 
dollar  and  a  quarter  a  bushel,  when  gold  stood  at  110,  and 
manufactured  goods  were  at  least  seventy-five  per  cent,  in  ad- 
vance of  old  prices,  suffer  to  the  extent  of  sixty-five  per 
cent,  in  making  his  exchanges  ?  I  answer,  that  his  sales  of 
home  produce  helped  to  make  up  a  good  share  of  the  loss, 
and  moreover  his  wheat  was  sent  to  Great  Britain,  where 
gold,  while  possessing,  as  here  and  everywhere,  "  intrinsic 
value,"  is  nevertheless,  as  with  us  under  even  specie  pay- 
ments, converted  partially  into  merchandise,  inasmuch  as 
millions  of  pounds  can  be  carried  there  or  taken  away  with- 
out affecting  the  abilit}^  to  loan,  and  because  Great  Britain 
was  in  the  same  plight  with  ourselves  ;  she  had  over  pro- 
duced the  relative  necessaries,  and  the  absolute  necessaries 
had  risen  relatively ;  and  in  this  quarter  the  remainder  of  the 
agriculturist's  loss  was  made  up. 

But  after  the  crisis  is  developed,  a  great  economy  of  ex- 
penditure, that  is  to  say  a  diminution  in  the  volume  and 
number  of  exchanges,  takes  place.  There  is  less  and  con- 
tinually less  merchandise  produced  and  exchanged,  but  at 
present  no  essential  change  in  the  necessaries,  except  that 
there  are  more  people  producing  them  for  themselves.  The 
"  balance  of  trade  "  between  Great  Britain  and  the  United 
States  is  favorable  to  the  hitter,  and  the  balance  arises  from 
exchanging  less  of  our  grain,  provisions,  petroleum,  and  cot- 
ton for  her  manufactured  goods,  than  we  did  before,  and  for 
a  time  she  sends  us  some  of  her  merchandise  that  is  earning 
her  nothing,  in  the  shape  of  gold.    Equilibrium  in  the  ex- 


CAUSE  OF  BANKING  AND  COMMERCIAL  CRISES. 


73 


changes  will  be  restored  at  last  by  her  buying  less  and  less 
of  us  so  long  as  we  do  the  same  by  her  ;  but  when  the  con- 
tracting volume  of  production  in  both  countries  shall  have 
reached  its  lowest  point,  the  expanding  volume  of  produc- 
tion in  both  countries  will  introduce  an  expanding  volume 
of  exchanges.  In  the  mean  time  the  class  who  had  supposed 
themselves  to  have  grown  rich  on  the  advance  in  city,  town, 
or  country  real  estate,  now  almost  confiscated  by  the  bur- 
dens of  taxation  created  by  enormous  current  expenses  and 
"  improvements"  at  extravagant  cost,  —  burdens  doubled  by 
the  improvident  issues  of  government  paper  not  retired  in 
time,  —  and  some  of  the  holders  of  stocks  and  debentures  of 
companies  that  have  fostered  and  directed  overstocks,  like 
that  of  coal,  have  lost  the  large  profits  supposed  to  be  locked 
up  in  stock,  or  become  bankrupt. 

On  the  whole,  the  results  of  the  enforced  economy  are  that 
inasmuch  as  there  can  be  no  overstock  of  the  necessaries 
of  life,  the  laborers,  producers,  and  distributors,  who  have 
been  compelled  to  be  idle,  will,  many  of  them,  succeed  in 
earning  their  own  absolute  necessaries  by  turning  to  agricul- 
tural pursuits  ;  others  who  have  lived  upon  imaginary  values, 
will  leave  the  cities  and  towns  and  find  some  other  business ; 
and  all  will  economize  in  the  use  of  articles  of  relative  neces- 
sity, the  economy  being  another  name  for  the  shrinkage  in 
production  of  these  necessaries,  and  the  diversion  of  capital 
and  labor  to  other  necessaries.  Net  savings  will  be  more  and 
more  applied  to  restore  waste  and  make  new  improvements 
in  the  productive  capital  applied  to  absolute  necessaries,  and 
so  far  as  actual  capital,  and  not  the  instruments  of  circulat- 
ing it,  in  the  shape  of  bills,  notes,  debentures,  stocks,  mort- 
gages, etc.,  and  the  actual  fruits  of  capital  and  labor  are  con- 
cerned, the  crisis  was  a  disease,  not  of  excess  on  the  whole, 
'but  of  congestion,  and  a  derangement  of  the  exchanges  going 
on  between  the  different  parts  of  the  social  system ;  and  the 
cure  lies  in  the  restoration  of  the  exchanges  ;  but  unfortu- 
nately, under  the  monetary  systems  of  England  and  the 
United  States,  we  have  abundant  stimulus  but  no  regulation, 
and  the  cure  comes  only  with  an  enhanced  liability  to  incur 


74 


POLITICAL  ECONOMY. 


the  danger  of  another  attack  of  the  original  disease,  in  a 
severer  form.  The  real  loss  lies  chiefly,  1st,  in  banks  :  enor- 
mous losses  arise  for  them,  through  the  failure  or  bank- 
ruptcy of  merchants  and  manufacturers ;  2d,  enormous 
losses  are  incurred  by  other  merchants  and  manufacturers 
who  do  not  become  bankrupt,  but  the  loss  of  the  latter  in 
a  national  point  of  view  is  partly  compensated  by  the  low 
prices  at  which  consumers  are  enabled  to  purchase ;  3d, 
the  losses  incurred  by  laborers,  who  cannot  now  dispose  of 
their  labor  ;  4th,  the  losses  of  railroad  companies,  capitalists, 
and  others,  who  have  built  railroads  attended  by  equal  loss, 
and  perhaps  bankruptcy  to  the  iron  manufacturers  :  but  this 
is  not  a  total  loss  to  the  country ;  a  large  part  of  it  is  made 
up  by  the  increased  value  of  produce,  and  consequent  rise  of 
land  in  the  neighborhood  of  the  roads. 

We  may  finish  the  summing  up,  by  adding,  that  the  prin- 
cipal loss  stated  in  the  fewest  possible  words,  consists  in  the 
blind  misdirection  of  energy,  of  enterprise,  labor,  and  capital ; 
the  actual  loss  cannot  be  estimated,  and  must  be  placed  on 
the  whole  upon  the  negative  side  of  the  equation ;  it  is  the 
difference  between  results  as  they  are  and  as  they  might 
have  been,  if  the  same  number  of  people  with  the  same  fac- 
ulties and  the  same  capital  had  been  so  restrained  in  the  pro- 
duction of  relative  necessaries  that  they  would  have  been 
compelled  to  produce  less  relative  necessaries,  and  enough 
more  absolute  necessaries,  to  maintain  such  an  equilibrium 
between  the  two  as  would  always  make  "  favorable  ex- 
changes," and  a  fair,  because  exact,  "balance  of  trade." 
These  blessings  can  never  be  permanently  enjoyed  by  Eng- 
land and  the  United  States  until  the  defects  of  their  bank- 
ing systems  are  at  last  brought  home  step  by  step,  and  line 
by  line,  to  the  knowledge  of  bankers,  manufacturers,  and 
merchants,  and  the  mass  of  theorists,  who  write  but  do  not 
demonstrate.  It  is  hardly  possible  to  keep  off  the  veil  thrown 
over  the  exchanges  of  products  by  their  auxiliary,  money, 
long  enough  to  discover  to  the  understanding  the  realities 
that  are  beneath.  Under  a  steady  system  of  production  and 
exchanges,  the  apparent  "  volume  of  trade  "  would  have  been 


CAUSE  OF  BANKING  AND  COMMERCIAL  CRISES.  75 


smaller,  as  manufacturers,  and  therefore  merchants,  would 
have  had  no  overstock,  and  therefore  ready  sales  ;  the  "  lines 
of  goods,"  and  therefore  the  discount  lines,  would  have  been 
smaller,  and  there  would  have  been  apparently  "  dall  and 
slow  times ; "  but  taking  the  whole  period  intervening  be- 
tween the  limits  of  expansion  and  contraction,  under  the 
present  banking  system,  and  the  same  period  under  a  strict- 
ly convertible  system,  with  bank-notes  convertible  into  gold 
coin,  moving,  circulating,  and  therefore  varying,  in  harmony 
with  production  as  well  as  consumption,  instead  of  gold  ex- 
ported, imported,  and  moved,  as  mere  merchandise,  the  aver- 
age volume  of  business  would  have  been  the  same.  In  a 
moral  or  social  and  political  point  of  view,  the  losses  from 
such  a  crisis  as  began  before,  but  was  made  manifest  by 
the  panic  of  1873,  aggravated  as  they  were  by  the  enormous 
issues  of  government  paper,  and  made  certain  by  the  stoppage 
of  the  contraction  begun  by  Mr.  McCulloch  in  1869,  cannot 
be  estimated.  The  indebtedness  of  individuals  can  be  wiped 
out  by  discharges  in  bankruptcy ;  that  of  states,  cities,  and 
towns  cannot.  There  is  no  rule  to  estimate  the  losses  ac- 
cruing from  turning  men  out  of  business,  and  laborers  out  of 
employment,  and  the  demoralization  and  crime  which  ensue. 
Last,  but  not  least,  is  the  "  adverse  exchange,"  which  turns 
production  and  distribution  into  a  lottery :  some  prizes  for 
the  few,  and  blanks  for  the  many,  as  we  have  seen  in  the 
most  aggravated  form  in  the  United  States  of  late.  Doubt- 
less many  enterprises  have  been  undertaken,  and  some  have 
been  successful,  that  would  not  otherwise  have  been  under- 
taken ;  but  this  does  not  compensate  the  national  loss,  and 
Americans  need  no  stimulus  in  this  regard,  but  rather  re- 
straint. 

The  eyes  of  bankers  and  merchants  have  been  brought  in 
all  probability  to  the  perception  of  two  important  truths: 
1st,  that  there  can  be  overproduction  ;  and  2d,  that  bank 
clearings  are,  only  in  effect^  a  settlement  of  credits.  Now 
would  be  the  time,  if  knowledge  were  sufficiently  advanced, 
to  found  the  true  science  of  Money  and  Exchange.  Until  a 
science  is  developed  by  thinkers  and  writers,  — and  tliere  can 


76 


POLITICAL  ECONOMY. 


be  none  until  we  have  demonstration  and  not  theory,  —  there 
will  be  no  practical  science  on  the  subject  for  bankers  and 
merchants.  The  difficulty  is,  that  every  man  who  writes, 
takes  up  some  theory  that  is  sustained  by  and  explains  some 
of  the  phenomena,  but  not  all,  and  yet  insists  that  it  can  ex- 
plain all.  Even  the  theory  of  the  convertible  bond  and  cur- 
rency theorists  has  some  facts  to  give  it  color.  They  say 
with  truth  that  specie  redemptions  under  our  system  amount 
to  little,  and  that  an  actual  contraction  took  place  prior  to 
1873.  They  are  wrong  in  their  opinion  as  to  what  caused 
the  contraction,  but  right  in  saying  that  there  was  contrac- 
tion, because  the  limit  of  expansion  had  been  reached.  They 
are  wrong  in  saying  that  contraction  brought  on  the  crisis, 
but  had  they  merely  asserted  that  a  further  issue  of  govern- 
ment paper  would  have  postponed  the  panic  phase  of  the 
crisis,  to  make  it  more  intense  at  a  future  day,  they  would 
probably  have  been  right. 

The  correct  argument  in  support  of  their  false  theory, 
although  they  do  not  make  it,  would  be  this :  by  the  large 
issues  of  government  paper  tokens,  and  the  subsequent  issues 
of  bank-notes,  both  of  which  had  arrived  at  their  maximum, 
the  total  of  possible  bank  loans  under  the  rules,  imperfect 
nevertheless  as  they  were,  regulating  the  reserve,  had  been 
about  reached;  therefore,  to  produce  any  more  iron,  rail- 
roads, rolling  stock,  cloth,  etc.,  was  impossible  without  more 
loans  to  enable  the  producers  to  reinvest  in  raw  material 
and  pay  for  labor.  Therefore,  the  producers  having  been 
brought  into  this  plight,  a  new  issue  of  government  paper 
furnished  with  a  safety  valve,  in  the  shape  of  a  3.65  specie 
bond,  into  which  any  possible  surplus  of  the  notes  might  be 
converted,  and  for  which  notes  might  be  at  any  time  ob- 
tained at  par,  would  be  the  remedy.  But  to  say  nothing  of 
the  more  violent,  because  suspended  operation  of  the  four  co- 
factors,  which  must  soon  follow  such  an  issue,  the  fallacy  in 
the  premises  lies  in  the  omission  of  the  fact  that  sales  had 
been  already  stopped  by  the  overstock,  and  that  they  would 
have  raised  the  prices  of  necessaries  against  themselves  by 
new  issues,  and  there  could  be  no  contraction  at  all  in  the 


CAUSE  OF  BANKING  AND  COMMERCIAL  CRISES.  77 


volume  of  notes,  until  by  the  suspension  of  further  work  and 
consumption  —  or,  in  other  words,  sales  for  cash  in  excess  of 
production  —  the  equilibrium  had  been  restored.  Thus  there 
could  be  no  conversion  into  the  3.65  bonds,  even  if  the  gov- 
ernment had  kept  them  ready  for  the  purpose  ;  in  other 
words,  excessive  production  over  and  above  any  possible  sales 
for  cash  had  been  effected  already  by  the  loan  of  notes, 
through  banks ;  and  hence  it  could  only  be  reduced  by  a  cor- 
responding contraction  of  loans,  just  as  Mr.  McCulloch  told 
Congress  and  the  country  that  the  only  way  to  reduce  ex- 
pansion was  to  contract  it.  It  was  better  to  reduce  it  grad- 
ually, than  suddenly  by  accumulating  gold,  admitting  the 
latter  process  possible.  These  theorists,  however,  are  as  cor- 
rect in  their  theory  as  those  who  would  maintain  the  sound- 
ness of  the  present  banking  systems  of  Great  Britain  and  the 
United  States. 

The  sum  of  the  matter,  then,  is  that  no  theory  should  be 
adopted  except  with  a  view  to  explaining  all  the  phenomena. 
When  it  will  not  do  this,  it  should  be  abandoned.  Rigorous 
demonstration  should  be  demanded,  and  terms  carefully  de- 
fined. By  expansion  of  production  I  mean  any  increase  of 
value  given  to  raw  material  by  labor,  combined  with  capital, 
in  excess  of  consumption ;  and  by  expansion  of  circulation, 
the  payment  of  money  for  the  labor  and  raw  material,  and 
profits  of  capital,  including  interest,  corresponding  to  that 
increased  value.  By  consumption  I  mean  a  sale  for  cash, 
which  usually  implies  consumption.  By  contraction  of  cir- 
culation I  mean  the  return  or  repayment  of  the  money  thus 
paid  out,  back  to  him  who  paid  it  out,  and  if  he  is  a  bor- 
rower of  the  money,  then  the  repayment  by  him  to  the 
lender ;  and  in  this  manner  the  circle  of  exchanges  is  com- 
pleted. Should  the  manufacturer  use  only  his  own  money, 
he  has  produced  new  value  as  the  result,  and  if  he  sells  for 
cash  immediately,  he  restores  the  money  back  to  his  own 
pocket,  safe,  or  account  in  bank,  and  the  expansion  of  circu- 
lation is  met  by  a  corresponding  contraction.  If  he  fails  to 
sell,  the  money  he  paid  out  remains  in  the  hands  of  others, 
giving  them  a  power  to  buy  any  and  all  things  they  choose 


78 


POLITICAL  ECONOMY. 


to  the  extent  of  the  money  he  has  thus  put  into  their  hands ; 
which  amount,  not  being  balanced  by  an  equal  amount  paid 
back  to  him  by  means  of  a  cash  sale,  puts  so  much  addi- 
tional means,  so  much  new  purchasing  power,  in  the  hands  of 
the  holders  of  the  money,  which  they  could  not  have  exer- 
cised had  he  not  paid  it  out.  This  power  of  buying,  thus 
transferred  and  exercised  through  the  money,  raises  prices 
before  the  manufacturer  can  use  the  money  again  in  produc- 
tion, by  receiving  it  back  through  cash  sales.  If  he  has  paid 
out  one  thousand  dollars  for  labor  and  materials,  and  cannot 
sell  the  product,  he  has  taken  out  of  the  market  so  much  ma- 
terial and  labor,  thus  virtually  reducing  the  actual  amount  of 
exchangeable  things  consumed  in  the  market,  while  he  has 
at  the  same  time  increased  the  amount  of  money  ready  to  be 
offered  towards  the  purchase  of  the  remainder.  Consumption 
cannot  be  increased  at  will ;  but  he,  directly  against  himself, 
has  put  an  extra  thousand  dollars  into  the  hands  of  laborers, 
who,  if  they  were  to  use  all  the  money  he  paid  them  in  still 
further  production,  would  increase  the  overstock ;  but  they  do 
not  so  employ  it ;  they  are  cash  buyers  of  the  necessaries  of 
life  like  all  others,  when  they  possess  the  means,  and  of  the 
relative  necessaries,  so  far  as  they  have  a  surpflus  after,  buy- 
ing the  absolute  necessaries.  But  the  quantities  of  absolute 
necessaries  they  will  consume  is  very  nearly  a  fixed  quanti- 
ty, the  other  a  variable  one ;  they  have,  therefore,  carried  up 
the  price  of  necessaries  they  require  absolutely,  and  the  rela- 
tive necessaries  they  actually  buy,  relatively,  by  becoming 
buyers  with  additional  cash  to  the  amount  of  one  thousand 
dollars,  over  and  above  what  they  would  have  had  the  means 
of  purchasing  if  the  manufacturer  had  been  unable  to  obtain 
a  loan  in  bank,  of  say  five  thousand  dollars,  in  order  to  lay 
out  four  thousand  dollars  in  the  purchase  of  raw  material, 
and  one  thousand  dollars  in  the  purchase  of  their  labor.  The 
same  result  follows  with  the  four  thousand  dollars  paid  out 
for  raw  material,  and  in  this  way  the  sellers  of  raw  material 
and  the  laborers  taken  together  can  buy  and  pay  for  five 
thousand  dollars  of  absolute  necessaries  more  than  they  could 
otherwise  have  done.    Instead  of  being  required  to  find  a 


CAUSE  OF  BANKING  AND  COMMERCIAL  CRISES.  79 


cash  buyer  who  will  take  their  labor  and  raw  material,  or, 
what  is  the  same  thing,  the  manufactured  articles  into  which 
they  have  been  converted,  and  so  enable  them  to  get  for  the 
manufactured  articles  they  have  produced  the  other  articles 
they  are  now  consuming,  and  thus  maintain  the  equilibrium 
of  the  exchanges  in  domestic  and  foreign  trade,  they  have 
been  allowed  to  eat,  drink,  and  wear,  to  the  amount  of  five 
thousand  dollars,  before  any  one  has  been  found  who  would 
take  their  manufactured  articles  and  give  them  what  they  are 
now  eating,  drinking,  and  wearing.  The  domestic  exchanges 
are  thus  blocked ;  and  looking,  for  the  present,  at  the  field 
from  the  industrial  instead  of  the  banking  side,  the  mate- 
rials of  an  industrial  crisis,  and  derangement  directly  of  the 
domestic  and  indirectly  of  the  foreign  exchanges,  are  being 
formed. 

To  make  the  point  still  clearer,  I  will  show  that  such  a 
result  might  follow  from  an  exclusively  gold  and  silver  cur- 
rency. A  corollary  meanwhile  from  the  foregoing  demon- 
stration, sustaining  what  has  been  said  before,  is,  that  prices 
result  from  and  are  proportioned  to  the  daily  average  of  con- 
sumption, or,  in  other  words,  sales  for  cash,  and  the  number 
of  money  units  in  the  hands  of  consumers,  in  other  words, 
buyers,  and  which  they  are  ready  and  willing  to  expend  in 
purchases  for  consumption,  or,  in  other  words,  cash.  There- 
fore we  may  add  the  further  corollary,  in  support  of  what  I 
have  stated  before,  that,  taking  gold  as  the  standard,  under  a 
currency  convertible,  as  in  Adam  Smith's  time,  when  pro- 
duction was  nearly  balanced  by  consumption,  when  the  ex- 
changes were  at  mutual  par,  and  when,  as  he  declares,  not 
more  than  one  trader  in  a  thousand  became  bankrupt,  the 
expansion  of  circulation  to  pay  for  labor  and  materials,  and 
thus  enable  the  laborers  and  holders  of  raw  material  to  buy 
and  consume  to  that  extent,  must  be  met  by  a  correspond- 
ing contraction  or  payment  back  of  the  money  to  him  who 
advanced  it,  as  soon  as  the  laborers  and  holders  of  raw  ma- 
terial have  laid  out  their  money ;  otherwise  there  will  be  an 
expansion  of  circulation  above  the  true  convertible  stand- 
ard of  gold,  which  may  be  called  expansion  above  the  gold 


80 


POLITICAL  ECONOMY. 


standard,  or  inflation  ;  and  if  a  government,  for  instance, 
were  to  issue  irredeemable  paper  in  large  quantities,  the  se- 
curity and  safety  of  the  issue  meantime  being  unquestioned, 
prices  would  rise  only  as  the  money  would  be  expended  for 
purposes  of  consumption ;  but  as  soon  as  the  paper  had 
become  discredited,  or  considered  more  or  less  doubtful,  it 
would  be  depreciated  as  well  as  inflated  ;  all  would  be  anx- 
ious to  get  rid  of  it ;  and  the  depreciation  might  be  carried 
so  far  as  to  cause  a  heavy  discount,  or  possibly  repudiation. 
The  latter  was  the  case  with  the  American  Continental  and 
the  French  Revolutionary  currency ;  and  the  former  with  the 
Michigan  Agricultural  Banks,  the  Free  Bank  currency  al- 
ready referred  to,  and  the  present  United  States  legal  tender 
notes,  during  the  civil  war.  Therefore,  inasmuch  as  I  call  the 
employment  of  money  in  production  in  advance  of  consump- 
tion. Expansion  of  Circulation,  and  the  carrying  of  prices 
above  what  they  would  be  if  production  were  balanced  by 
consumption.  Inflation  above  the  Gold  Standard ;  where 
there  is  more  or  less  probability  of  repudiation,  and  accord- 
ing to  the  measure  of  probability,  I  call  the  result  Deprecia- 
tion. This  puts  Production  and  its  exchanges,  and  money, 
the  auxiliary  of  Production  and  its  exchanges,  upon  an  in- 
telligible footing,  without  any  theories,  and  with  only  de- 
monstrated propositions  and  real  science.  "  Money,"  the 
"exchanges,"  "demand  and  supply,"  and  the  "intrinsic 
value  of  gold  coin,"  are  all  chaos  unless  thus  explained.  In 
order  to  get  wheat,  provisions,  and  sugar  without  raising 
and  producing  them  himself,  one  must  have  boots,  shoes, 
hats,  cloth,  etc.,  to  exchange  for  th^m,  and  some  one  who 
will  buy  them ;  and  to  manufacture  the  latter  one  makes 
loans  in  bank,  so  far  as  he  has  not,  or  cannot  obtain,  cash 
of  his  own.  The  general  result  —  that  is  to  say,  inflation 
—  could  not  happen,  if  there  was  an  equal  distribution  of 
capital  and  cash  means  among  men.  If  all  had  the  same 
amount,  there  would  be  a  dead  level  of  equality,  and  no 
progress.  One  man  has,  say  a  hundred,  another  fifty,  and 
another  ten  thousand  pounds,  dollars,  or  francs,  and  many 
others  have  little  or  none,  but  greater  or  less  skill  to  labor. 


CAUSE  OF  BANKING  AND  COMMERCIAL  CRISES.  81 

Man's  ability  to  consume,  and  his  actual  consumption  of 
necessaries,  depends  upon  his  getting  the  money  to  do  it, 
by  means  of  his  labor  joined  with  capital.  By  means  of 
capitalists'  and  bankers'  loans  he  is  enabled  to  do  what  he 
could  not  otherwise  do,  consume  not  only  necessaries  but 
luxuries ;  whereas  if  the  money  of  the  banker  and  capitalist 
were  not  loaned,  as  happens  in  barbarous,  and  more  or  less 
in  semi-barbarous  countries,  there  would  be  no  such  loans 
and  no  such  consumption  ;  and,  therefore,  no  matter  how 
great  the  accumulations  of  treasure  in  the  East,  so  long 
as  productive  energy  remains  in  statu  quo^  there  are  no 
new  kinds  of  products  to  exchange,  and  hence  no  change  in 
prices,  because  there  is  nothing  to  change  prices.  The  aux- 
iliary money  can  be  of  no  increased  effect  until  its  principal 
increases  ;  but  let  us  suppose,  for  the  sake  of  argument,  such 
an  increase  to  take  place,  and  skilled  laborers  and  capitalists 
with  machinery,  and  a  corresponding  increase  of  necessaries 
(which,  by  the  way,  would  be  impossible  perhaps  in  China), 
and  a  corresponding  desire  to  exchange  and  consume,  and  we 
should  see  great  activity  though  still  no  inflated  prices.  But 
let  agriculture  remain  stationary,  capitalists  make  loans  in 
gold  or  silver  out  of  their  reserves  to  manufacturers,  and  let 
manufacturers  produce  faster  than  their  goods  could  be  con- 
sumed, and  prices  would  be  inflated  above  the  former  metal- 
lic standard.  This,  however,  could  never  happen  in  fact, 
because  one  of  the  most  important  elements  of  value  in  gold 
and  silver  as  money  is  the  persistence  of  national  habits, 
resulting  in  slow  and  gradual  changes  only,  if  any  changes 
occur  at  all.  The  theory  of  intrinsic  value,  then,  in  gold 
and  silver,  aside  from  their  use  as  money,  which  the  bullion- 
ists  urge,  is  false,  like  most  theories.  The  ratio  of  intrinsic 
value  in  the  arts  to  value  or  purchasing  power,  arising  from 
their  use  as  money,  is  only  a  fraction  of  the  whole  value. 
The  value  of  them  as  money  arises  from  their  distribution  as 
it  actually  exists.  To  disturb  the  distribution  deranges  the 
intrinsic  value  by  making  it  greater  at  one  place  and  less  at 
another,  so  far  as  any  disturbance  of  the  kind  is  possible. 
Mr.  Ricardo's  theory  was,  that  gold  and  silver  are  distrib- 
6 


82 


POLITICAL  ECONOMY. 


uted  over  the  world  in  such  proportions  as  to  accommodate 
themselves  to  the  natural  traffic  that  would  take  place  if  the 
trade  were  one  of  barter.  Here  is  another  theory  which  is 
contradicted  by  fact.  More  silver  has  been  sent  to  and  re- 
tained by  China,  in  proportion  to  traffic,  than  to  any  other 
country,  by  the  civilized  nations  of  the  world,  because  the 
Chinese  would  not  traffic,  that  is  exchange  their  teas  for 
European  and  American  goods ;  in  other  words,  they  de- 
manded an  exchange  for  silver  instead  of  goods.  In  like 
manner,  other  nations  make  demand  for  certain  portions  of 
gold  and  silver,  according  to  their  wants  for  the  arts  and 
for  money,  or  for  ballast  against  inflation,  as  in  the  United 
States,  and  the  uniform  competition  of  all  the  different  de- 
mands results  in  certain  proportions  being  constantly  main- 
tained in  the  quantities  annually  received  by  each  nation ; 
and  all  these  ratios  of  demand,  operating  with  the  persist- 
ence of  national  habits,  make  gold  at  this  time,  aside  from 
the  influence  of  government  issues,  and  deposit  and  discount 
banking,  a  steady  measure  of  value.  Possibly  a  more  steady 
measure  might  be  attained  by  restoring  silver  to  its  former 
use,  but  never  unless  with  the  consent  of  all  nations. 

All  theories,  then,  being  utterly  disregarded,  the  proposi- 
tion demonstrated  is  this :  The  circulation  of  the  United 
States,  under  specie  payments,  consists  mostly  of  bank  debt 
in  the  shape  of  notes  loaned  to  producers ;  these  loans  cause 
an  overstock  of  relative  necessaries,  because  production  is  al- 
lowed to  proceed  so  far  ahead  of  consumption  as  to  produce  a 
crisis.  The  crisis  has  a  banking  as  well  as  an  industrial  side, 
but  could  not  have  a  banking  side  without  bank  loans,  as  it 
could  have  no  industrial  side  without  overproduction.  The 
next  proposition  is  that  the  evil  of  overproduction  can  be  to  a 
great  degree  remedied,  which  for  the  present  I  shall  not  ex- 
amine, but  leave  it  for  the  future.  If  it  can  be  demonstrated 
that  the  mischief  can  be  remedied,  the  problem  to  be  solved 
is,  to  show  the  best  method  of  doing  it.  The  probable  rem- 
edy, if  there  be  one,  stated  in  the  most  general  terms,  is,  that 
as,  under  our  system,  gold  reserve  is  not  money  but  only  a 
ballast  against  the  inflation  of  bank-notes  and  bank-credits, 


CAUSE  OF  BANKING  AND  COMMERCIAL  CRISES.  83 


the  gold  ballast  must  be  converted  into  money,  and  if  such  a 
conversion  can  be  accomplished,  then  follows  the  problem 
already  mentioned.  If  the  whole  science  of  production  and 
exchange,  as  effected  through  the  agency  of  money,  is  des- 
tined to  continue  to  be  the  sport  of  theories  and  theorists, 
all  theories  have  some  truth  in  them,  and  all  should  be 
examined,  and  those  adopted  that  seem  to  have  the  most. 
The  use  of  a  convertible  bond  for  conversion  of  surplus  notes 
instead  of  a  coin  reserve  in  the  shape  of  ballast  rather  than 
money,  is  by  no  means  absurd,  if  any  method  can  be  dis- 
covered of  stopping  inflation  before  it  proceeds  to  a  crisis. 
The  discovery  is  not  yet  made,  and  probably  will  not  be. 

The  theorists  who  maintain  that  a  good  and  safe  currency 
could  be  obtained  by  the  plan  of  mutual  convertibility  be- 
tween government  currency  and  government  debt  in  the 
shape  of  a  bond  bearing  interest  at  three  and  sixty-five  one 
hundredths  per  cent.,  are  entirely  right  in  asserting  that  con- 
vertibility is  more  in  name  than  in  fact  under  "  specie  pay- 
ments "  in  the  United  States,  although  the  remedy  would  be 
the  opposite  of  what  they  propose,  and  are  as  nearly  right 
as  those  who  insist  that  safety  and  security  would  exist  if 
gold  and  silver  were  the  only  currency,  with  banks  of  de- 
posit and  discount,  free  to  discount,  without  such  arrange- 
ments as  would  check  overproduction  ;  and  quite  as  nearly 
right  as  the  theorists  who  maintain  that  there  can  be  no  in- 
flation, or,  in  other  words,  undue  expansion  of  bank-notes 
when  convertible  under  our  present  banking  system,  because 
the  latter  are  contradicted  by  the  crisis  of  1857  ;  and,  in 
short,  they  are  as  nearly  right,  or  ought  to  be  presumed  as 
nearly  right,  as  any  other  theorists  who  have  not  yet  abso- 
lutely demonstrated  the  truth  of  their  theories.  These  mat- 
ters cannot  be  further  examined  here,  but  will  be  under  the 
head  of  Banking  in  the  United  States.  Finally,  to  speak 
figuratively,  we  may  say,  that  if  we  follow  the  river  of  Sup- 
ply up  to  its  source.  Production,  we  shall  find  that  it  never 
overflows,  if  left  to  itself,  but  only  when  its  waters  are  set 
back  by  Credit  in  the  guise  of  Money  ;  and  if  we  compare 
the  circulation  of  the  fruits  of  capital  and  labor  to  that  of 


84 


POLITICAL  ECONOMY. 


the  human  body,  we  may  say  that  obstruction* of  free  circu- 
lation through  weakness  or  excess  in  any  part,  leads  to  con- 
gestion and  crisis,  howsoever  small  or  howsoever  great  the 
volume  of  circulation.  If  we  speak  as  bankers  and  mer- 
chants, we  may  say  that  there  is  derangement  of  the  ex- 
changes, and  adverse  balance  of  trade ;  if  we  speak  as  phi- 
losophers, that  absolute  wants  must  and  will  control  relative 
and  conditional  ones,  in  spite  of  all  human  efforts  to  the 
contrary ;  and  if  we  would  give  a  name  and  title  to  the  sci- 
ence resulting  from  the  investigation  (the  foundation  of  all 
other  social  science)  we  may  call  it  The  Science  of  Produc- 
tion and  Exchange. 


CHAPTER  III. 


THE  THEORIES  OF  MILL  AND  PRICE  AS  TO  THE  CAUSES  OF 
BANKING  AND  COMMERCIAL  CRISES. 

Mr.  Price  says  a  true  crisis  is  a  destruction  of  means, 
a  diminution  of  wealth  ;  that  the  laborers  employed  were 
consumers  of  food  and  tools,  while  they  produced  nothing  of 
exchangeable  value,  and  thus  actually  annihilated  wealth. 

The  error  in  these  assertions  lies  in  calling  one  of  the 
effects  the  cause.  If  the  crop  of  British  wheat  were  to  fail 
totally  in  any  season,  the  loss  would  be  not  only  from  thirty, 
to  forty  millions  of  pounds  through  the  failure  of  the  crop 
itself,  but  there  would  be  losses  arising  to  other  producers, 
from  the  inability  of  their  home  customers,  the  producers  of 
the  wheat,  to  buy  as  much  as  usual,  and  the  disorganization 
of  labor  which  would  follow.  If  manufacturers  of  goods 
never  produced  beyond  the  ability  of  consumers  to  pay  for 
and  consume,  —  in  other  words,  to  give  something  else  in 
the  shape  of  other  productions,  or,  in  still  other  words,  to 
sell  for  cash,  —  there  could  be  no  industrial  crisis,  and  con- 
tinual discharge  of  laborers,  and,  on  the  other  hand,  no 
banking  crisis  caused  by  the  bankruptcy  of  manufacturers 
and  merchants  and  their  inability  to  pay  bank  loans.  If 
railroads,  city  houses  and  stores,  and  public  improvements 
were  never  built  or  made  beyond  the  point  where  they  would 
yield  a  fair  income  or  a  public  benefit  equivalent  to  the  cost, 
no  crisis  could  be  brought  on  or  intensified  by  such  causes. 
Therefore,  for  all  practical  purposes,  and  with  the  view  to 
remedies,  we  may  well  say  that  redundant  production,  which 
means  production  to  meet  artificial  wants,  all  the  way  down 
from  those  most  artificial  to  the  least  artificial,  in  excess  of 
the  market  for  them  furnished  through  the  production  of 


86 


POLITICAL  ECONOMY. 


absolute  necessaries,  —  in  other  words  still  more  general, 
production  to  meet  artificial  in  excess  of  production  to  meet 
natural  wants,  —  is  in  a  general  sense  the  cause  of  industrial 
crises,  and  that  great  loss  attends  them  through  shrinkage  in 
price,  and  in  some  cases  total  loss  of  the  investments.  In 
time,  however,  in  the  United  States  hitherto,  the  manufact- 
ured goods  remaining  on  hand  have  been  sold,  and  popula- 
tion and  production  have  made  the  railroads  productive.  If 
this  is  admitted  to  be  a  correct  practical  conclusion  from  all 
the  facts,  and  a  correct  answer  to  the  question.  What  is  a 
crisis  ?  the  next  inquiry  is,  What  is  the  cause  ?  The  theory 
of  Mr.  Price,  that  it  is  a  destruction  of  means  only,  cannot 
stand,  because  he  says  that  the  usual  cause  is  the  unpro- 
ductive consumption  of  the  laborers  who  work  and  the  loss 
of  the  capital,  tools,  and  materials  employed  ;  whereas  the 
labor  is  not  wholly,  but  only  partially,  unproductive.  His 
statements,  however,  are  clear  and  emphatic,  and  eminently 
true  as  to  the  fact  of  great  national  loss ;  but  he  makes  the 
mistake  of  calling  one  of  the  effects  the  cause. 

Mill,  on  the  other  hand,  says  that  a  commercial  crisis  is 
simply  a  collapse  of  prices  resulting  from  an  undue  exten- 
sion, and,  without  saying  so,  probably  intended  to  have  it 
implied  that  the  national  loss  lies  only  in  the  losses  of  those 
who  suffer  directly  from  the  collapse  in  the  prices  of  goods 
bought  on  speculation.  Mill  says,  also,  that  the  active  cause 
is  credit :  "  What  does  act  on  prices  is  credit,  in  whatever 
shape  given,  and  whether  it  gives  rise  to  any  transferable 
instruments  capable  of  passing  into  circulation  or  not.".  Mr. 
Price  adopts  and  reaffirms  this  proposition  with  his  usual 
clearness  and  emphasis,  on  page  168  of  his  "  Principles  of 
Currency."  Now  credit,  unaided  by  bank  and  other  loans, 
is  available  in  production  only  to  a  slight  extent,  and  to  a 
moderate  extent  in  the  distributing  markets,  by  way  of 
raising  prices.  The  credit  given  by  one  merchant,  —  for 
instance,  a  commission  merchant,  who  sells  prints  or  cloth 
for  the  producer  to  a  jobbing  merchant,  and  by  the  latter  to 
a  retail  merchant,  —  and  even  the  credit  extended  by  com- 
mission, importing,  and  jobbing  houses  to  other  houses  or 


THEORIES  OF  MILL  AND  PRICE. 


87 


individuals,  who  buy  on  the  chances  of  a  rise,  is  confined  to 
a  few  lines  of  goods  ;  it  does  not  extend  to  the  whole  mar- 
ket. Mere  personal  credit  will  not  pay  for  labor  expended 
upon  raw  materials,  like  cotton,  wool,  or  pig  iron  ;  nor  will 
it  pay  for  the  raw  materials  themselves,  for  they  have  cost 
labor,  and  the  laborers  must  be  paid.  Personal  credit  must 
therefore  first  be  exchanged  for  bankers'  credit  in  the  shape 
of  bank-notes  or  bank  debt,  transferable  by  the  instru- 
mentality of  checks,  and  so  invested  with  a  second  and  fur- 
ther quality  which  personal  credit  does  not  possess,  namely, 
paying  power,  in  addition  to  purchasing  power.  Mercantile 
credit  is  a  very  limited,  but  banking  credit  an  unlimited 
power,  —  unlimited  at  least  by  anything  short  of  that  state 
of  redundant  production  which  causes  an  industrial  and  bank- 
ing crisis.  The  word  "  industrial  "  is  better  than  "  commer- 
cial." The  English  mind  is  wedded  to  the  idea  conveyed 
by  "  overtrading,"  and  of  this  idea  Mill  and  Price  are  the 
exponents.  They  all  take  it  for  granted  that  the  cause  lies 
in  the  distributing  and  not  the  producing  market,  as  the 
term  "  overtrading "  implies.  The  difficulty  is  that  they 
have  explored  the  course  of  the  stream  of  production  where 
it  widens  out  into  distribution,  instead  of  following  it  up  to 
the  head-waters.  If  we  suppose  all  production  in  a  given 
country  to  stop  at  a  given  time,  and  distribution  to  go  on 
until  the  last  article  is  sold  and  consumed,  all  bank  debt  in 
the  shape  of  notes  and  book  entry  will  be  retired,  and  cap- 
ital no  longer  productive,  and  therefore  worthless  ;  money 
in  the  shape  of  gold  and  silver  will  also  retire  or  leave  the 
country,  for  the  most  part.  The  office  of  money,  therefore, 
is  not  only  to  distribute  the  fruits  of  capital  and  labor,  but 
to  pay  labor  to  produce  as  fast  as  these  are  consumed.  The 
occasional  disposition  of  fixed  or  circulating  capital  is  merely 
incidental  to  the  distribution  of  the  fruits.  If  production 
were  to  stop,  the  check  to  consumption  by  rise  in  price  of  ar- 
ticles bought  on  speculation,  through  credit,  would  lengthen 
the  period  of  rising  prices  by  the  gradual  diminution  of  com- 
modities. The  nominal  rise  of  price  of  the  articles  bought 
on  credit  would  therefore  be  maintained,  and  the  speculation 


88 


POLITICAL  ECONOMY. 


successful,  through  the  maintenance  of  the  rise.  This  is  an 
ideal  case,  assumed  to  illustrate  the  bearing  of  production  — 
the  source  of  supply  —  upon  speculative  purchases  in  the  dis- 
tributing market.  In  the  case  supposed  there  is  a  nominal 
rise  by  way  of  price.  Turn  now  to  actual  facts,  to  realities, 
and  how  is  it  ?  In  nine  tenths  of  all  the  cases  actually  occur- 
ring there  is  nominal  and  therefore  real  loss  to  those  who 
buy  on  credit,  whether  they  use  it  directly,  or  on  the  other 
hand  indirectly,  by  exchanging  it  for  banker's  debt,  which 
has  paying  as  well  as  purchasing  power,  making  the  banker 
their  creditor  instead  of  the  seller  of  goods.  If  in  nine  tenths 
of  all  cases  they  lose,  it  follows  that  the  loss  comes  from  sup- 
plies thrown  upon  the  distributing  from  the  producing  mar- 
kets, thus  absolutely  increasing  the  stock,  as  well  as  from  the 
diminished  consumption  through  rise  of  price,  which  causes 
a  relative  increase  of  the  supply.  Hence,  looking  at  the  sub- 
ject from  this  abstract  quarter,  it  is  certain  that  every  crisis 
comes  from  a  disturbance  of  the  relations  between  producers 
and  consumers.  In  the  most  abstract  form,  the  proposition 
demonstrated  is  this:  A  "commercial"  crisis,  sometimes 
called  "  overtrading,"  is,  when  reduced  to  its  most  abstract  or 
general  terms,  an  overstock  extending  to  all  or  some  commod- 
ities intended  for  distribution  and  consumption,  over  and 
above  the  ability  of  consumers  to  pay  for  and  use,  —  in  other 
words,  beyond  their  immediate  wants,  —  and  carried  to  such 
an  extent  as  to  require  the  discharge  of  laborers  upon  an 
extensive  scale.  This  increases  the  overstock  by  making  the 
laborers  comparatively  non-consumers  at  the  same  time  that 
they  become  non-producers,  causing  shrinkage  in  values, 
forced  sales  and  bankruptcy  for  the  producers,  and  the  same 
results  for  the  distributors  or  merchants,  and  through  them 
for  the  bankers.  The,  latter  are  the  first  movers  and  the 
originators  of  this  disturbance.  This  I  affirm  now  in  answer 
to  the  question.  What  is  the  active  cause  ? 

Leave  out  the  delays  from  time  and  space ;  suppose  no 
money  to  be  necessary  to  exchange  and  no  merchants  to  dis- 
tribute the  fruits  of  labor  and  capital ;  every  producer  is  daily 
met  by  other  producers,  and  exchanges  the  fruits  of  his  labor 


THEOEIES  OF  MILL  AND  PRICE. 


89 


for  theirs.  Can  there  be  any  undue  accumulation  or  redun- 
dant production  by  any  one  producer  ?  Not  to  any  impor- 
tant extent  certainly,  for  all  producers  will  buy  only  what 
they  can  consume,  and  that  is  exactly  what  they  can  pay  for, 
and  they  can  pay  just  to  the  extent  that  they  can  produce 
themselves.  No  one  can  produce  to  excess,  because  no  one 
can  produce  beyond  the  ability  of  others  to  consume.  But 
while  there  can  be  no  overstock  on  the  side  of  absolute  nec- 
essaries, can  there  not  be  on  the  side  of  those  required  to 
satisfy  wants  more  or  less  artificial  —  the  producers  who  pro- 
duce to  satisfy  absolute  wants  being  unable  to  make  an  over- 
stock ?  There  certainly  can,  if  they  will  not  only  all  trust 
each  other,  but  make  the  producer  of  absolute  necessaries 
also  trust  them.  The  overstock  that  follows,  however,  will 
shortly  come  to  an  end,  because  the  rise  in  price  of  absolute 
necessaries  through  purchases  on  credit,  and  the  impossibility 
of  forcing  the  grand  total  of  all  necessaries  to  rise  in  quan- 
tity for  a  long  time  above  what  may  be  called  the  base  line 
of  population  and  agriculture,  devoted  to  absolute  neces- 
saries, or,  to  simplify  the  expression  still  further,  the  agri- 
cultural base  line^  will  soon  bring  about  an  equilibrium  of 
production.  The  ability  of  the  producers  to  produce  on 
credit  would  soon  come  to  an  end  in  all  cases  where  no  arti- 
ficial cause  interposed  to  prevent  it  by  making  the  producers 
of  absolute  necessaries  temporarily  share  the  loss,  and  thus 
spreading  it  as  it  were  over  all  producing  capital. 

It  is  production  in  certain  quarters,  in  excess  of  production 
in  other  quarters,  then,  which  produces  the  crisis  which  Mr. 
Price  asserts  is  a  destruction  of  means.  The  destruction  of 
means  is  not  an  active  cause,  but  only  one  of  the  results  of 
an  active  cause;  and  that  cause  is  a  want  of  harmony  in 
production.  Mr.  Price,  like  Adam  Smith  and  M.  J.  B.  Say, 
supposes  money  to  be  a  commodity  like  a  cart  or  any  other 
tool,  and  so  places  the  commodity  theory  of  money  in  the 
plainest  light  possible.  He  also  asserts  that  deposits  arise 
from  the  sale  of  commodities  which  are  paid  for  by  a  balanc- 
ing or  set-off  of  debts.  From  these  propositions  his  error  in 
relation  to  the  cause  of  commercial  crises  naturally  follows. 


90 


POLITICAL  ECONOMY. 


Metallic  money  is  not  a  commodity,  but  a  series  of  units,  as 
already  shown,  and  the  value  of  the  unit  embodied  in  the 
metal  lies  wholly  in  what  it  purchases  and  not  in  itself  —  value 
in  the  actual  metallic  unit  being  thus  wholly  conventional, 
and  therefore  merely  ideal.  The  units  are  not  a  commodity, 
but  units  of  valuation,  purchase,  and  payment,  limited  by  a 
commodity  of  universal  exchangeable  value  in  this  conven- 
tional character.  It  is  this  unit,  embodied  in  metal,  or  bank- 
notes mostly  covered  by  a  deposit  of  metal,  which  pays  for 
goods  through  clearings.  It  is  not  in  fact  units  of  bank 
debt  which  pay  for  commodities  through  clearings,  but 
where  goods  are  merely  sold,  not  for  consumption  in  reality, 
although  they  may  be  intended  for  that  purpose,  it  is  pre- 
cisely the  same  thing  whether  there  is  gold  in  the  reserve 
on  that  particular  occasion,  or  whether  there  is  none,  be- 
cause if  gold  were  taken  out  of  the  reserve  by  the  buyer  to 
pay  for  the  goods,  it  would  be  immediately  deposited  by  the 
seller  in  the  reserve,  as  soon  as  the  sale  took  place.  So  far 
as  the  reserve  remains  the  same  after  sales  take  place,  it  may 
be  apparently  equivalent  to,  but  it  is  not  in  fact  a  mere 
balancing  of  debts.  The  buyer's  debt  to  the  bank,  which  re- 
sults from  his  loan  in  bank,  to  enable  him  to  buy  the  goods, 
is  not  set  off  against  or  balanced  by  the  debt  of  the  seller 
to  the  bank  for  a  like  amount,  because  a  set-off  or  balancing 
of  debts  destroys  and  annihilates  both  debts  mutually  ;  but  in 
this  case  the  new  debt  to  the  bank,  created  by  the  loan  of  the 
buyer,  does  not  balance  but  annihilates  and  takes  the  place 
of  the  debt  of  the  seller  to  the  bank,  leaving  the  same  amount 
of  bank  debt  standing  as  before.  Whatever  profit  the  buyer 
pays  the  seller  over  and  above  what  the  goods  cost  to  the 
latter  creates  precisely  so  much  additional  debt  to  the  bank, 
and  therefore  precisely  so  much  additional  debt  due  by  the 
bank  to  depositors,  whether  metal  or  bank-notes  be  carried 
away  by  the  seller,  or  whether  they  be  not.  If  they  are  not 
carried  away  bank  debt  is  increased  by  so  much  over  and 
above  reserve  ;  if  they  are  carried  away  bank  debt  over  and 
above  reserve  is  increased  by  precisely  the  same  amount  ; 
the  ratio  of  bank  reserve  to  bank  debt  is  diminished  to  the 


THEORIES  OF  MILL  AND  PRICE. 


91 


same  extent  in  each  case.  Absolutely  unproductive  con- 
sumption, if  caused  by  bank  loans,  diminishes  the  ratio  of 
bank  reserve  in  like  manner.  Loans  to  pay  for  labor  and  raw 
material,  so  long  as  the  product  remains  unsold,  have  the 
same  effect  upon  reserve.  Now  the  amount  of  absolutely 
unproductive  consumption  through  bank  loans  is  compara- 
tively small,  and  there  could  surely  be  no  goods  to  sell  if 
none  were  produced.  Therefore  the  origin  of  that  part  of 
deposits  which  is  Total  Bank  Debt  over  and  above  Total 
Banking  Reserve  lies  in  production  and  the  succeeding  prof- 
its of  the  several  merchants  who  buy  the  goods,  deducting 
from  the  total  absolutely  unproductive  consumption. 

The  fountain  and  origin  of  this  part  of  deposits,  therefore, 
may  be  found  in  that  part  of  deposits  which  is  in  excess  of 
reserve.  But  if  a  cash  buyer  who  does  not  borrow  his  cash 
—  his  possession  of  the  cash  being  a  demonstration  of  the 
fact  that  he  or  some  one  else  for  him  has  caused  an  equal 
amount  of  goods  to  be  exchanged  for  consumption  —  buys 
the  goods  of  the  merchant  or  other  producer,  who  purchased 
them  by  the  aid  of  a  bank  loan,  which  remains  unpaid,  the 
latter,  by  means  of  the  cash,  pays  so  much  bank  debt.  It  is 
entirely  immaterial  whether  the  cash  consists  of  a  credit 
standing  in  bank  to  the  account  of  the  buyer,  or  whether  it 
consist  of  gold  or  bank-notes,  because  in  either  case  it  dimin- 
ishes by  so  much  the  grand  total  of  bank  debt  over  and 
above  the  grand  total  of  bank  reserve.  Hence  the  increase 
of  bank  debt  over  and  above  reserve  arises  from  production, 
in  the  first  instance,  as  the  primary  cause,  and  the  profits 
accruing  to  the  several  buyers,  who  add  further  value  to  the 
product  by  their  capital  and  labor ;  including,  of  course,  all 
increased  cost  for  interest,  carriage,  and  insurance,  as  the 
secondary  cause.  On  the  other  hand,  the  increase  of  bank 
reserve,  which  is  relative  diminution  of  bank  debt,  arises 
from  sales  of  goods  to  consumers.  Hence  it  is  absolutely 
certain  that  sales  of  goods  to  consumers,  in  other  words  for 
cash,  are  accomplished  by  paying  money  into  the  reserve, 
while  purchases  of  labor  and  raw  material  and  the  succeed- 


92 


POLITICAL  ECONOMY. 


ing  charges,  expenses,  and  profits  of  the  distributors,  who  by 
buying  the  product  intervene  between  the  first  producer  and 
consumer,  create  bank  debt  over  and  above  reserve,  and 
therefore  deposits.  Deposits  arise,  therefore,  not,  as  Mr.  Price 
asserts,  from  the  sale,  but  from  the  production,  of  goods ;  and 
the  total  of  deposits,  minus  reserve,  shows  the  total  of  pro- 
duction accomplished  by  means  of  bank  loans.  This  total 
is  an  amount  of  production  over  and  above  what  could  have 
taken  place  without  deposits  and  bank  loans.  To  this  total 
may  be  added  the  resulting  totals  arising  from  a  considerable 
part  of  savings  bank  loans  and  loans  by  individuals,  as  I  have 
demonstrated  elsewhere.  The  latter  totals  come  from  sav- 
ings of  wages  of  labor  deposited  in  savings  banks  whose 
products  have  been  sold  to  merchants  who  have  not  yet 
found  a  consumer's  market,  and  from  profits  of  production 
on  the  same  products  paid  to  capitalists  who  have  made 
loans  to  producers  out  of  those  profits. 

But,  again,  Mr.  Price  says  there  can  be  no  inflation,  no 
excess,  of  bank-notes.  He  is  right  except  as  to  the  small 
total  of  absolutely  unproductive  consumption  arising  from 
bank  loans  of  bank-notes,  because  the  notes  are  all  called  for 
to  pay  for  labor,  raw  material,  expenses,  charges,  and  profits 
arising  between  the  original  producer  and  consumer.  For 
these  purposes  the  notes  are  all  wanted.  The  fallacy  in  the 
premises  lies  then  in  the  fact  that  production  is  ignored  and 
distribution  only  considered.  The  notes  are  undoubtedly  all 
needed,  if  it  be  necessary  to  bring  to  pass  all  this  production 
in  advance  of  consumption.  But  this  advance  of  production 
is,  as  I  have  shown  elsewhere,  the  cause  of  banking,  indus- 
trial, and  commercial  crises,  and  the  circulation  of  the  notes 
which  causes  the  excess  ought  to  be  checked.  Therefore, 
if  production  can  be  limited  by  consumption  in  proportion 
to  the  increase  of  bank  reserve,  as  compared  with  bank  debt, 
as  I  have  shown  elsewhere  that  it  can  be,  such  limitation 
would  check  the  circulation  of  bank-notes  used  to  cause  such 
production  exactly  by  the  extent  to  which  it  might  be  car- 
ried. 

Mr.  Mill,  on  the  other  hand,  mistakes  a  collapse  of  credit 


THEORIES  OF  MILL  AND  PRICE. 


93 


used  in  buying  up  one  article  of  commerce  found  in  the  mar- 
ket, like  tea,  for  instance,  for  a  commercial  crisis.  But  the 
former  embraces  only  a  small  part  of  the  commerce,  the  lat- 
ter the  whole  of  it.  He  has  no  idea  whatever  of  overpro- 
duction, or  what  may  be  called  excessive  production  on 
credit  by  the  aid  of  bank  loans.  He  lays  down,  however, 
one  proposition  about  money  which  is  true  and  fundamental, 
and  which  I  have  demonstrated  to  be  true.  He  says  that 
money  acts  on  prices  only  by  being  tendered  (he  might 
have  added,  and  paid)  for  commodities.  This  I  have  shown 
to  be  true,  because  money  is  a  series  of  units  of  valuation, 
purchase,  and  payment.  Had  he  followed  this  proposition 
down  to  its  necessary  conclusion,  —  that  the  units  must  have 
some  practical  limitation,  either  in  the  material  of  which 
they  are  made  or  in  commodities  sold,  if  they  are  to  answer 
the  purposes  of  what  we  call  money,  —  a  rigorous  and  cau- 
tious analysis  might  have  conducted  to  the  solution  of  the 
problem.  What  is  money  ?  He  might  have  discovered  that 
there  are  two  elements  of  price:  first,  increase  or  decrease 
in  the  total  volume,  which  means  the  total  number  of  units 
circulated  (tendered  and  paid)  in  exchange  for  commodi- 
ties ;  and  secondly,  increase  or  decrease  of  circulation  of  those 
units,  whatever  the  total  volume  or  number  of  them  may  be, 
through  loans. 

This  would  have  opened  before  him  the  character  and 
function  of  money,  and  would  possibly,  by  the  aid  of  rigor- 
ous analysis,  have  carried  him  to  the  correct  conclusion,  that 
all  circulation  of  money,  in  excess  of  that  given  it  by  its 
owners  (depositors),  and  therefore  in  excess  of  commodities 
actually  exchanged  for  consumption,  must  necessarily,  after 
deducting  the  small  amount  of  absolutely  unproductive  con- 
sumption which  it  causes  through  improvident  or  accidental 
loans,  be  expended  in  paying  for  labor,  services,  and  raw 
material,  to  produce  something  which  is  in  excess  of  any  act- 
ual market,  and  therefore  only  on  credit  and  in  hope  and 
confidence  of  a  market,  and  which  ought  therefore,  if  practi- 
cable, to  be  limited  universally  at  some  fixed  point.  It 
would  have  led  him  also,  perhaps,  to  the  conclusion  that 


94 


POLITICAL  ECONOMY. 


money  is  not  a  commodity,  because  it  can  by  no  possibility 
be  separated  from  its  use  ;  it  is  only  money  while  it  is  being 
used.  If  it  acts  on  prices  only  when  tendered  and  paid,  the 
total  quantity  on  hand  does  not  affect  prices,  but  only  the 
greater  or  less  use  of  it,  and  that  must  depend  upon  the 
amount  of  it  being  paid  out,  while  the  latter  depends  upon 
the  amount  of  production,  and  not  the  amount  of  consump- 
tion taking  place.  Gold  and  silver  are  as  abundant  as  ever 
in  England,  and  so  is  paper  money  in  the  United  States,  but 
the  circulation  of  money  has  been  greatly  contracted  in  both 
countries  within  the  last  four  years  by  contraction  of  produc- 
tion. If  gold  or  silver  coin  is  a  commodity  like  wheat,  its 
price,  which  is  its  purchasing  power  or  exchangeable  value, 
reckoned  in  wheat  or  other  commodities,  ought  to  depend, 
like  wheat,  on  the  quantity  in  market,  more  than  on  the 
quantity  which  is  being  sold ;  but  Mr.  Mill  as  well  as  Mr. 
Price,  while  insisting  that  money  acts  on  prices  only  while 
being  tendered  (sold)  for  commodities,  insist  with  their  pred- 
ecessors, Adam  Smith  and  M.  J.  B.  Say,  that  the  mercan- 
tile theory  of  intrinsic  value  in  gold  and  silver  coin  is  true, 
because  each  is  a  commodity.  It  is  impossible  to  arrive  at 
any  correct  conclusions  about  the  use  of  money  as  it  acts 
upon  the  production  and  exchange  of  commodities  upon  any 
such  theory. 


CHAPTER  rV. 


VALUE  AND  PRICE. 

Value  and  Price  are  in  reality  the  same.  Intrinsic  value 
is  a  contradiction  in  terms ;  because  all  value  ex  vi  termini  is 
extrinsic,  that  is  to  say  it  is  something  other  than  the  thing 
valued,  and  of  which,  commercially,  the  thing  valued  is  the 
equivalent.  If  the  thing  valued  be  placed  on  one  side  of  a 
simple  equation,  that  which  gives  it  value  takes  the  other 
side :  if  a  bushel  of  wheat  is  worth  one  dollar,  one  dollar  is 
worth  a  bushel  of  wheat.  Therefore  the  assertion  that  gold 
coin  possesses  intrinsic  value  and  paper  money  does  not,  is 
false,  because  it  affirms  that  gold  coin  is  valued  by  itself, 
when  it  can  only  be  valued  by  what  it  will  exchange  for ; 
and  if  the  same  amount  in  paper  money  will  exchange  for 
the  same  things  as  the  gold,  both  possess  the  same  value,  which 
is  extrinsic,  and  not  intrinsic.  There  is,  however,  a  latent 
truth  in  the  popular  fallacy,  that  gold  coin  possesses  intrinsic 
value :  if  it  possess  not  intrinsic  value,  it  certainly  possesses 
intrinsic  utility  to  so  high  a  degree  that  it  is  worth  on  the 
average  nearly  or  quite  as  much  in  the  shape  of  bullion  as 
of  coin. 

But  what  is  this  intrinsic  utility  ?  Those  who  affirm  that 
gold  coin  possesses  intrinsic  value  will  reply.  Utility  in  the 
arts.  But  herein  lies  another  fallacy  less  apparent,  but  quite 
as  great  as  the  first,  because  both  are  not  only  partially  but 
entirely  opposed  to  the  truth.  The  intrinsic  utility  named 
is  utility  as  a  material  to  manufacture  money  units,  because 
universal  convention,  evidenced  by  universal  use,  makes  gold 
the  material  out  of  which  to  manufacture  the  unit.  Did  gold 
possess  no  utility  in  the  arts  whatever,  the  whole  of  it  would 
be  found  in  the  shape  of  coin,  and  the  only  result  would  be 


96 


POLITICAL  ECONOMY. 


to  make  each  money  unit  heavier  than  now.  The  value  of 
the  commodity  used  as  money,  then,  is  entirely  absorbed  in 
its  value  as  money.  Intrinsic  utility  means  only  that,  in- 
trinsically, gold  coin  can  be  used  as  money.  There  is,  how- 
ever, another  fallacy  of  a  different  kind,  arising  from  stating 
only  a  part  of  the  truth.  It  is  intrinsic  value  in  the  arts 
which  has  led  to  the  idea  of  intrinsic  value  in  gold  as  money, 
and  has  retired  large  sums  from  circulation,  while  utility  in 
the  arts  tends  to  absorb  a  considerable  portion,  as  it  is  cheap- 
ened by  a  more  active  circulation,  and  by  the  use  of  paper 
and  credit  money.  Utility  in  the  arts  does  not  make  the 
gold  any  more  or  any  less  money  than  it  would  be  without 
such  utility :  it  only  furnishes  a  sound  reason  for  its  universal 
adoption  as  a  material  for  the  manufacture  of  money  units. 
That  sound  reason  is,  the  tendency  of  an  undue  expansion  of 
the  volume  of  money  units  through  coinage,  government  and 
bank  issues,  and  consequent  cheapening  of  gold  bullion,  to  be 
neutralized  by  a  corresponding  absorption  of  gold  in  the  arts  ; 
while  an  undue  contraction,  by  the  withdrawal  of  bank  and 
government  issues,  or  diminished  circulation  of  gold,  is  in 
whole  or  part  counteracted  by  the  coinage  of  bullion  and 
plate.  Thus,  the  popular  idea  of  intrinsic  value  in  gold  is 
resolved  into  intrinsic  utility,  arising  not  only  from  the  fact 
that  it  is  a  material  limited  in  quantity,  but  from  the  further 
fact  that  its  utility  in  arts  tends  to  moderate  excess  and 
supply  defect  of  money  units  made  tangible  in  coin.  The 
value  of  money  units  made  tangible  in  gold  coin,  of  money 
units  evidenced  by  and  made  tangible  in  bank-notes,  and  of 
intangible  units  evidenced  by  entries  or  inscriptions  on  bank 
books,  is  wholly  and  equally  extrinsic,  and  consists  of  the 
things  for  which  they  will  and  do  exchange ;  and  therefore 
the  whole  amount  of  units  of  money  expended  for  purposes 
of  consumption  in  the  United  States  in  one  year  marks  the 
value  of  the  whole  number  of  units  of  weights  and  measures 
of  commodities  bought.  But  inasmuch  as,  on  the  average, 
incomes  are  nearly  all  expended  in  consumption  (consump- 
tion is  within  a  small  percentage,  on  the  average^  equal  to 
production),  an  increase  of  money  units  by  government  and 


VALUE  AND  PEICE. 


97 


bank  issues  will  in  time  increase  the  prices  of  these  units  of 
weights  and  measures  in  proportion  to  the  amount  of  the 
outstanding  issues.  But  this  inference  is  too  hasty  :  it  in- 
cludes and  affirms  one  of  that  kind  of  fallacies,  the  assertion 
of  which  without  regard  to  actual  facts  has  rendered  the  es- 
tablishment of  a  science  of  money  and  exchange  almost  im- 
possible. 

It  is  not  necessarily  true'  that  prices  will  rise  in  the  pro- 
portion named,  because  annual  savings  are  made,  and  they 
are  all  made  by  refraining  from  consumption,  that  is  to  say 
by  not  spending  money  when  it  might  be  spent.  But  if  we 
suppose  five  per  cent,  of  income  to  be  saved  on  the  average 
only,  and  government  and  bank  issues  to  take  place,  so  as  to 
double  the  whole  volume  of  money,  even  then,  ought  not 
prices  to  rise  fifty  per  cent.  ? 

To  assert  that  they  would,  would  involve  a  fallacy  of  the 
same  kind  arising  from  rejecting  important  facts.  If  money, 
and  therefore  capital,  were  evenly  and  equally  distributed  to 
every  consumer,  and  all  consumers  were  to  consume  alike, 
the  question  might  be  answered  in  the  affirmative ;  but  the 
distribution  is  not  even  and  equal :  some  consume  all  their 
income,  and  vast  numbers  are  obliged  to  contract  their  con- 
sumption largely  after  an  industrial  crisis.  Price  in  money, 
therefore,  varies  according  to  the  demand,  and  prices  will 
grow  higher  or  lower  as  the  average  quantity  of  money  ex- 
pended in  consumption  increases  or  decreases.  By  the  same 
rule  the  average  prices  of  money,  reckoned  in  units  of  weights 
and  measures,  will  increase  or  diminish  in  proportion  to  the 
quantities  of  the  units  of  weights  and  measures  in  market. 
The  amount  of  money  expended  in  any  one  year  will  de- 
pend upon  the  amount  possessed  by  each  buyer  on  the  one 
hand,  and  the  amount  he  saves,  or  refrains  from  spending,  on 
the  other  hand.  If  he  is  a  capitalist,  and  has  money  con- 
tinually coming  into  his  hands  which  he  is  unable  to  spend, 
and  invests  it  in  banking,  or  in  the  discount  of  bills  and  notes, 
when  there  is  an  active  commercial  demand  for  loans,  and  in- 
terest is  rising  in  consequence,  what  is  done  with  the  proceeds 
of  these  loans  ?  They  are  invested  in  production,  because 
7 


98 


POLITICAL  ECONOMY. 


tliey  can  be  invested  in  no  other  way,  and  are  wanted  for  no 
other  purpose.  On  the  average,  there  can  be  no  overpro- 
duction of  things  not  absolutely  necessary  in  excess  of  those 
absolutely  necessary ;  but  so  long  as  loans  without  any  limit 
other  than  that  of  an  industrial  crisis  are  made,  and  because 
there  is  no  method  of  preventing  or  regulating  them,  the  ex- 
cess of  money  that  capitalists  cannot  use  for  themselves,  and 
the  whole  of  that  which  the  banks  can  lend,  is  distributed  by 
loans,  and  increases  the  yearly  average  of  money,  as  an  in- 
strument to  buy  with,  in  the  hands  of  laborers,  producers, 
and  sellers  of  raw  material.  This  raises  money  prices,  by  in- 
creasing the  quantity  of  money  on  hand  and  in  readiness  to 
spend  with  these  laborers,  producers,  and  sellers  of  raw  ma- 
terial, who  embrace  nearly  the  whole  of  the  active  members 
of  society  :  the  more  money  there  is  in  the  hands  of  the 
whole  community  to  buy  with,  the  more  money  there  is 
loaned,  so  much  more  money  there  is  to  pay  out  for  articles 
to  be  consumed.  To  give  full  effect  to  increased  issues  by 
way  of  raising  prices,  the  additional  issues  must  go  into  cir- 
culation by  loans.  The  loan  market  varies,  however,  and 
this  is  the  reason  why  prices  do  not  necessarily  respond  to 
the  full  extent  of  the  increased  issues.  But  this  is  not  the 
whole  explanation  of  this  complex  subject :  the  quantity  of 
absolute  necessaries  produced  is,  almost  all,  annually  con- 
sumed, and  there  is  no  overstock ;  and  for  that  reason,  and 
that  only,  there  cannot  be  on  the  long  run  —  that  is  to  say, 
upon  the  average,  ten  years  more  or  less  —  an  excess,  glut, 
or  overstock  of  things  not  absolutely  necessary  to  existence. 
But  for  a  portion  of  the  period  —  say  the  first  half  —  in  which 
the  average  is  made  up,  there  can  be  an  excess  arising  from 
two  causes :  1st,  tlie  rise  of  prices  caused  by  the  expansion  of 
circulation  referred  to,  affecting  even  the  commodities  in 
which  overstock  is  taking  place ;  2d,  the  ability  to  cause,  by 
means  of  loans,  production  of  overstock,  or  excess  in  those 
things  to  produce  which  the  loans  are  made.  If  the  con- 
sumption is  equal  to  the  production,  if  the  sales  for  cash 
equal  the  loans,  prices  cannot  possibly  rise,  because,  then,  as 
the  units  of  money  increase  in  circulation  for  the  purpose  of 


VALUE  AND  PRICE. 


99 


buying  what  is  in  the  market,  so  also  and  precisely  in  the 
same  ratio  do  the  units  of  weights  and  measures  of  those 
things  which  are  actually  bought.  As  the  denominator 
(money)  increases,  so  does  the  numerator  (weights  and 
measures  of  commodities),  and  the  ratio  or  fraction  continues 
to  be,  therefore,  the  same.  But  it  is  a  common  saying,  and 
a  common  belief  among  bankers,  merchants,  and  manufact- 
urers, and  it  is,  moreover,  true,  that  prices  rise  up  or  nearly 
up  to  the  time  of  a  crisis,  and  then  fall,  not  only  as  much 
as  they  had  risen,  but  considerably  more,  in  the  articles  not 
absolutely  necessary  to  existence,  and  in  which  it  is  impossi- 
ble to  assign,  b}^  any  such  abstract  rule  as  writers  refer  to 
(e.g.  M.  J.  B.  Say,  Mill,  Price,  and  others),  the  limits  of  pos- 
sible economy  and  possible  extravagance.  It  is  all  a  ques- 
tion of  possihility  only,  upon  their  theory,  growing  out  of  the 
relation  of  what  is  limited  to  what  is  absolute.  The  truth 
and  the  whole  truth  lies  in  these  few  words :  Absolute  neces- 
saries cannot  he  overproduced  ;  relative  necessaries  cannot 
upon  the  average  he  overproduced.,  because  the  producers  of 
the  latter  will  starve  unless  they  stop  producing  at  regular  or 
irregular  intervals.  Hence  it  follows  that  so  long  as  the 
producers  of  relative  necessaries  can  obtain  absolute  neces- 
saries with  the  proceeds  of  loans  put  in  circulation  by  them 
to  buy  absolute  necessaries  they  will  do  so,  while  there 
is  an  apparent  advance  in  the  price  of  what  they  sell,  be- 
cause it  furnishes  them  the  means  of  paying  some  of  their 
loans,  leaving  a  profit  besides.  Therefore,  in  taking  an 
inventory,  they  will  reckon  the  overstock  in  figures  show- 
ing a  profit,  as  will  the  merchants,  who  also  have  overstock 
which  they  cannot  sell.  The  money  units  in  circulation 
have  increased  in  numbers  in  the  hands  of  all  buyers,  bank- 
ers and  capitalists  included,  and  so  the  increase  of  units  has 
been  mostly  in  the  denominator  of  the  ratio  (money  units), 
but  the  stimulus  of  advancing  prices  and  apparent  prosperity 
has  increased  also  somewhat,  but  not  in  proportion  the  units 
of  weights  and  measures  of  commodities  consumed,  (the  nu- 
merator of  the  ratio)  because  people  spend  more  ;  still,  be- 
cause the  denominator  (money  units)  has  increased  in  excess 


100 


POLITICAL  ECONOMY. 


of  the  numerator  (units  of  weights  and  measures  of  com- 
modities), prices  in  money  have  therefore  risen.  Hence  it  is 
not  only  probable  but  absolutely  certain,  that  prices  rise,  and 
can  rise,  only  by  the  aid  of  bank  loans,  when  and  so  long  as 
an  overstock  of  relative  necessaries  is  being  made ;  and  prices 
fall  as  soon  as  the  overstock  brings  on  a  crisis  and  forces 
goods  on  the  market.  If  the  overproduction  of  relative  neces- 
saries in  any  one  year  were  impossible,  therefore,  as  the  pro- 
duction of  absolute  necessaries  is  in  fact  impossible,  prices 
would  be  stable  and  uniform  ;  the  present  production  of  gold 
might  be  quadrupled  for  years  without  raising  prices,  and,  on 
the  other  hand,  the  entire  failure  of  the  annual  production 
of  gold  would  have  no  effect  whatever,  because  the  money 
unit  substitutes  for  gold-money  units,  in  the  shape  of  bank- 
notes and  bank  credits,  to  the  precise  extent  that  they  have 
become  and  are  substitutes  for  gold  units,  would  of  them- 
selves increase  and  take  the  place  of  some  of  the  gold,  and 
liberate  so  much  gold  for  use  in  those  countries  having  a 
gold  currency.  Moreover,  any  further  defect  would  be  reme- 
died by  coinage  of  bullion,  and,  if  necessary  to  an  equilibrium 
of  prices,  of  plate  itself.  I  say  if  necessary ;  but  it  would 
not  be  necessary,  because  a  more  active  circulation,  suffi- 
cient to  produce  equilibrium,  would  arise  from  the  large 
masses  of  metallic  money  (in  France,  for  instance),  now 
kept  partially  out  of  circulation  by  the  beneficent  operation 
of  that  fallacy  of  what  is  called  The  Mercantile  System,  — 
the  assumption  that  gold  and  silver  coin  possesses  intrinsic 
value.  Hence  I  lay  down  the  universal  law,  as  the  result  of 
the  foregoing  demonstration  :  — 

Were  Production  and  Consumption  alike  within  short 
periods ;  were  production  balanced  by  consumption  within 
one  year,  there  would  not  be,  because  by  no  possibility  could 
there  be,  any  material  excess  or  defect  of  prices ;  rise  or  fall 
of  price  in  any  one  article  would  arise  only  from  excess  or 
defect  relative  to  the  rest.  Were  the  money  units  all  metal- 
lic, and  should  the  metal  in  ingots  largely  increase,  there 
would  be  sooner  or  later,  undoubtedly,  a  rise  of  prices,  by  a 
general  increase  of  money  units ;  the  denominator  would  in- 


VALUE  AND  PRICE. 


101 


crease  in  excess  of  the  numerator  of  the  ratio.  But  what  do 
bank  loans  furnish  ?  Money,  undoubtedly,  and  not  what  is 
most  erroneously  called  Credit.  It  is  money  in  the  shape 
of  gold  coin,  silver  coin,  and  bank-notes,  not  only  for  the 
most  part,  but  altogether.  Suppose  payment  were  made 
partly  by  checks.  The  sellers  of  raw  material  and  the  sell- 
ers of  labor  obtain  payment  of  the  checks  in  the  same  me- 
dium ;  if  the  sellers  of  raw  material  send  in  the  checks  for 
collection  and  credit  of  their  account  in  the  banks  where 
they  deal,  a  "  clearing  "  might  save  the  associated  banks  the 
trouble  of  handling  the  coin  or  the  notes.  It  is  precisely  the 
same  in  principle  as  the  payment  of  coin  or  bank-notes  to 
the  laborers  ;  the  difference  is  merely  a  matter  of  the  coin  or 
notes  getting  back  to  the  common  or  consolidated  fund  in  the 
deposit  and  discount  bank,  a  little  later  in  the  latter  case, 
and  a  little  earlier  in  the  former.  It  is  a  great  fallacy  to  sup- 
pose that  there  is  any  difference  in  principle  between  these 
two  cases :  that  the  first  is  a  circulation  of  bank  credit ;  the 
latter,  of  money.  Nevertheless,  it  is  the  fallacy  upon  which 
the  Bank  Act  of  1844  in  England  was  founded,  through 
confounding  the  distinction  between  potential  and  actual 
money  ;  money  not  in  circulation,  and  money  in  circulation  ; 
in  short,  by  adhering  to  the  mercantile  theory,  that  gold  and 
silver  coin  are  commodities  and  possess  intrinsic  value.  It 
is  not  merely  the  excessive  and  ill-regulated  circulation  of 
money,  therefore,  but  circulation  not  regulated  at  all,  which 
enables^the  labor  and  material  placed  in  overstock  to  be  paid 
for,  and  prices  to  advance  until  the  materials  of  a  crisis  are 
stored  up,  and  the  crisis  comes  as  the  natural  remedy. 

The  most  marked  of  all  the  phenomena  in  the  whole  prog- 
ress of  this  commercial,  industrial,  and  banking  cycle  is  the 
rise  and  fall  of  prices,  —  a  phenomenon  described  in  its  as- 
cending scale  as  abundance  of  money,  and  in  its  descend- 
ing scale  as  scarcity  of  money.  This  phenomenon  has  no 
objective,  but  only  a  subjective  reality  ;  in  other  words,  it  is 
effect  in  both  its  phases  and  not  a  cause  of  itself.  Moreover, 
the  overstock  of  the  services  and  products  of  labor  is  also 
subjective  only ;  it  is  effect  and  not  cause  :  it  is  the  effect  of 


102 


POLITICAL  ECONOMY. 


bank  loans,  which  enable  producers  to  pay  for  labor  and 
materials  going  into  overstock,  and  of  the  ascending  scale  of 
prices  arising  from  the  increased  circulation,  which  enables 
them  to  sell  at  a  profit  while  the  overstock  is  being  pro- 
duced. The  purchasing  power  of  the  money  they  put  in 
circulation  to  pay  for  labor  and  materials  may  be  and  is 
constantly  growing  less,  but  so  long  as  it  pays  their  bank 
loans  and  a  little  more  they  are  making  an  apparent  profit : 
the  realities  of  the  case  do  not  appear  until  the  crisis  comes. 
Rise  in  prices,  then,  comes  from  increased  circulation,  not 
of  bank  credits,  but  of  money,  through  bank  loans  ;  bank 
credits  are  not  themselves  circulated,  but  are  powers  to  cir- 
culate money  out  of  the  common  or  consolidated  fund  in 
bank,  and  have  no  objective,  but  only  a  subjective  existence. 
They  are  the  result  of  bank  loans,  and  not  the  cause  of  bank 
loans.  Overstock  is  also  the  result  of  bank  loans  and  rising 
prices  up  to  the  time  of  the  crisis.  The  overpowering  and 
uncontrollable  crisis  brings  the  overstock  to  market ;  the 
producers  as  well  as  the  bankers  often  to  bankruptcy  ;  and 
makes  low  prices  in  spite  of  abundant  money  in  bank  coffers, 
by  diminishing  the  ability  to  pay  for  what  is  offered  for  sale, 
and  thus  contracting  the  circulation  of  money,  the  direct 
opposite  of  the  previous  expansion.  The  rising  and  falling 
prices  taken  together  and  compared  with  the  things  pur- 
chased, woidd  show  average  prices.  Had  prices  been  steady 
at  the  average,  it  would  have  arisen  from  the  fact  that  the 
contraction  of  circulation  was  equal  to  its  expansion,  as  I 
have  shown  elsewhere ;  and  this  equality  of  expansion  and 
contraction  of  circulation  would  have  arisen  from  the  fact 
that  all  the  products  of  labor  were  exchanged  for  cash  as  fast 
as  produced,  causing  bank  loans  to  contract  as  fast  as  they 
could  expand.  A  metallic  reserve,  where  production  and 
consumption  thus  balance,  would  be  unnecessary,  moreover, 
so  far  as  steadiness  of  prices  is  concerned,  and  therefore  might 
be  dispensed  with  altogether.  Steadiness  of  prices  would 
come  without  a  metallic  reserve  if  the  products  of  labor 
would  always  sell.  These  products  of  labor  would  all  sell, 
if  not  in  excess  :  hence  it  is  a  great  mistake  to  affirm  that  a 


VALUE  AND  PRICE. 


103 


crisis  arises  entirely  from  unproductive  consumption.  It  is 
an  excess  of  energy  of  production  whicli  causes  the  crisis, 
and  the  creation  of  the  excess  is  made  possible  by  two  com- 
pound factors,  — the  ability  to  borrow  money  out  of  the  con- 
solidated deposit  fund,  to  pay  for  labor  and  material,  with- 
out any  other  limit  than  an  impending  banking  crisis  ;  and 
the  scale  of  prices,  constantly  rising  up  to  that  period,  which 
makes  production,  as  far  as  sales  can  show,  profitable.  The 
final  result  is,  that  during  the  whole  cycle  of  rising  and  fall- 
ing production,  and  consequent  rising  and  falling  prices,  the 
total  production  is  no  more  than  it  would  have  been  had 
production  been  steady,  in  like  manner  as  average  prices 
equal  rising  and  falling  prices ;  the  latter  being  in  fact  the 
result  of  the  former. 

Harmony  of  production,  therefore,  is  as  essential  to  national 
wealth  as  energy  of  production.  Want  of  harmony,  money 
aside»  is  the  cause  of  banking,  commercial,  and  industrial 
crises  ;  and  unproductive  consumption  to  a  certain  extent  is 
one  of  the  effects :  it  is  not  the  cause  of  such  crises,  as  Mr. 
Price  asserts.  England  and  the  United  States  are  periodi- 
cally sufferers  from  this  cause,  and  of  late  Germany  has 
suffered  from  the  same  cause.  The  "  German  Indemnity  " 
was  really  German  Loss.  Too  much  labor  was  devoted  to 
other  purposes  than  the  production  of  absolute  necessaries  ; 
the  equilibrium  of  production  was  destroyed.  France,  on  the 
other  hand,  has  comparative  harmony  as  well  as  energy  of 
production,  and  frugal  habits  are  the  result. 


\ 


CHAPTER  V. 


BANKING  IN  ENGLAND  AND  EXPANSION  AND  CONTRAC- 
TION OF  CIRCULATION  UNDER  THE  BANK  ACT  OF 
1844. 

Banking  in  England  is  like  banking  in  the  United 
States  in  all  essential  particulars.  The  difference  lies  in  the 
fact  that  in  England  the  circulation  out  of  banks  is  carried 
on,  for  the  most  part,  in  gold  and  silver  coin,  and  gold  vouch- 
ers, called  Bank  of  England  notes,  given  by  the  bank  for  a 
like  amount  in  gold  coin ;  the  remainder  of  the  circulation 
is  effected  by  notes  issued  for  a  like  amount  of  government 
debt  due  the  bank,  and  amounting,  perhaps,  to  one  sixth  of 
the  whole.  For  all  practical  purposes,  therefore,  I  call  the 
money  circulated  outside  of  banks  coin. 

But  why  do  I  say  circulation  outside  of  banks  ?  Is  there 
such  a  thing  as  circulatipn  inside  of  banks?  I  use  the 
term  in  order  to  lay  a  foundation  to  make  my  meaning 
clear.  Such  a  phrase  as  circulation  in  or  into  a  bank,  or  cir- 
culation out  of  a  bank,  is  never  used,  because  it  is  entirely 
at  variance  with  all  theories  upon  the  subject  of  money  or 
banking,  and  therefore  with  common  opinion.  The  common 
theory,  and  therefore  the  common  belief,  upon  the  subject  is, 
that  a  bank  deals,  either  altogether,  or  for  the  most  part,  in 
what  is  called  debt ;  that  metallic  money  is  a  commodity, 
and  that  bank-notes,  although  nominally  money,  are  in 
truth  money  only  so  far  as  there  is  gold  in  reserve  to  pay 
them.  Now,  it  is  susceptible  of  the  clearest  demonstration 
that  gold  coin  as  money  is  not  a  commodity  ;  to  affirm  that 
it  is  a  commodity,  involves  a  fallacy  which  has  hitherto  ren- 
dered all  attempts  to  explain  the  phenomena  of  circulation, 
banking,  exchange,  and  commercial,  industrial,  and  bank- 


BANKING  IN  ENGLAND. 


105 


ing  crises  impossible.    Nevertheless,  it  is  not  only  a  fallacy, 
but  it  is  almost  impossible  to  resist  it,  because  it  approaches 
so  closely  to  the  truth.    Gold  bullion  is,  with  sHght  differ- 
ence, worth  its  weight  in  coin,  and  coin  minus  alloy  is  worth 
its  weight  in  bullion ;  therefore,  says  all  the  world,  gold  coin 
is  a  commodity,  and  a  paper  dollar  is  worth  nothing  except 
in  the  promise  written  upon  it.    The  premises  and  the  con- 
clusion are  unimpeachable  ;  the  fallacy  lies  in  not  carrying 
into  the  premises  the  whole  truth  of  the  case.    Gold  bullion 
is  useful,  not  only  to  make  coin,  but  also  plate  and  jewelry  ; 
and  it  is  also  eminently  useful  in  dentistry,  and  in  other  arts 
and  manufactures  besides  jewehy  ;  but  all  this  is  incidentally 
and  not  principally  important.    It  is  incidentally  important, 
because  it  has  carried  into  plate  and  the  arts,  as  I  have 
shown  elsewhere,  an  amount  of  metal  equal  in  weight,  and 
therefore  in  value,  to  one  half  of  all  the  gold  in  gold  coin 
throughout  the  commercial  world.    Previously  to  1844  the 
Bank  of  England  was  only  bound  to  maintain  the  convertibil- 
ity of  its  notes,  keeping  such  a  reserve  as  it  might  choose  for 
that  purpose  ;  since  1844  it  has  issued  notes  secured  by  a  like 
amount  of  government  debt,  as  above  stated,  and  also  what 
may  be  called  gold  vouchers,  having  the  semblance  of  bank- 
notes with  an  equal  reserve  in  gold  to  exchange  for  them. 
Has  the  Bank  Act  of  1844  accomplished  any  important 
change  ?    If  the  volume  of  gold  coin,  gold  vouchers,  and 
bank-notes  put  in  circulation  since  the  Act  of  1844  is 
smaller,  as  compared  with  the  volume  of  bank-notes  and  gold 
put  in  circulation  before  the  act,  relatively  to  the  units  of 
capital  and  commodities   distributed  and  exchanged,  the 
range  of  prices  has  been  relatively  less,  but  the  average  vari- 
ation has  been  the  same.    The  tendency,  however,  to  dimin- 
ish the  ratio  of  variation  in  prices,  by  the  use  of  a  so  much 
larger  proportion  of  metal  in  the  circulation  since  1844,  may 
have  been,  and  probably  has  been,  largely  counteracted,  by 
maintaining  a  much  smaller  reserve  in  the  joint  stock  and 
private  banks  ;  the  smaller  the  total  reserve  the  larger,  and 
the  greater  the  total  reserve  the  less,  the  circulation ;  higher 
prices  accompanying  the  former,  lower  the  latter.    As  the 


106 


POLITICAL  ECONOMY. 


banks  do  not  publish  their  condition,  the  only  evidence  of 
change  is  in  the  reserve  of  the  Bank  of  England,  where  they 
keep  a  large  portion  of  their  metal.  The  Act  of  1844  was 
passed  upon  the  theory  that  a  metallic  circulation  being  of 
all  others  the  steadiest,  a  circulation  consisting  largely  of 
notes  having  an  equal  amount  of  gold  behind  them  would 
vary  in  amount  as  a  metallic  currency  would  under  like  cir- 
cumstances. This  theory  was  and  is  absolutely  true  ;  it  is 
as  true  to-day  as  the  day  the  Bank  Act  passed.  The  circula- 
tion of  England  has  for  more  than  thirty  years  varied  sub- 
stantially as  a  metallic  one  would  under  like  conditions. 
This  is  saying  nothing  beyond  the  truth  of  the  case  :  the 
small  amount  of  the  notes  of  the  bank  secured  by  gov- 
ernment debt,  when  compared  with  the  total  of  the  money 
in  circulation,  may  well  be  regarded  as  of  no  importance  in 
respect  to  the  question  of  variation ;  we  may  call  the  circu- 
lation a  metallic  one  for  all  practical  purposes. 

The  theory,  then,  is  true,  but  what  has  it  availed?  Prices 
have  varied  up  and  varied  down,  and  there  has  been  no 
more  steadiness  of  prices  than  before  the  act  was  passed. 
There  has  been  no  gain  whatever  in  that  respect ;  and,  if 
any  general  result  as  to  prices  is  desirable,  it  is  that  stead- 
iness which  is  supposed  to  belong  to  a  metallic  circulation, 
in  contradistinction  to  one  of  paper. 

FALLACIES  IN  THE  THEORY  OF  THE  BANK  ACT  OF  1844. 

There  must,  therefore,  be  a  fallacy  in  the  theory  of  the 
Bank  Act  of  1844,  if  it  has  given  no  additional  steadiness  to 
the  circulation.  The  theory  is  undoubtedly  true,  but,  for 
the  reason  given,  it  cannot  contain  the  whole  truth.  The 
founders  of  the  bank  took  it  for  granted  that  gold  coin  in  its 
character  of  money  is  a  commodity,  and  that  deposits,  exclu- 
sive of  reserve,  are  a  substitute  for,  but  are  not,  money.  I 
have  already  demonstrated  that  gold  coin  in  its  character  of 
money  is  not  a  commodity,  and  that  in  the  ratio  of  price  the 
question  is  not,  what  kind  of  units,  but  how  many  units, 
whether  metallic,  paper,  or  credit,  are  in  the  denominator? 
What  shall  I  say  to  the  other  assumption,  that  bank  credits 


BANKING  IN  ENGLAND. 


107 


are  a  substitute  for,  but  not,  money  ?  This  assumption  is 
historically  and  logically  true  for  all  practical  purposes,  but 
not  absolutel}^  true ;  absolutely  speaking  it  is  false,  as  I  have 
shown  elsewhere.  But  why  do  I  say  that  the  proposition  is 
historically  and  logically  true  ?  Because  bank  credits  have 
no  objective  reality  in  themselves ;  they  are  the  development 
and  the  result  of  deposits  of  metallic  and  paper  money  ;  they 
are  not  a  system  or  a  process  having  an  independent  exist- 
ence of  itself,  but  a  debt  arising  to  depositors,  originally 
from  the  deposit  of  coin  and  notes.  This  debt  is  not  money 
in  itself.  Therefore  the  assumption  referred  to  is  true.  But 
the  assumption  does  not  contain  the  whole  truth  ;  there  is  a 
monstrous  fallacy  lurking  in  it,  arising  from  the  supposition 
that  bank  credit  has  a  positive  existence  of  its  own  independ- 
ently of  money,  instead  of  being  merely  the  result  of  the 
deposit  of  coin  and  bank-notes,  and  the  loan  of  a  large  por- 
tion of  these  by  the  banks ;  and  that  a  credit  in  bank  is, 
therefore,  substantially  like  all  other  credit.  This  fallacy 
arises  from  the  former  one,  that  gold  coin  in  its  character  of 
money  is  a  commodity  circulating  as  a  commodity,  while 
credit  circulates  as  credit.  Money  having  conventional  value 
only  can  by  no  possibility  be,  in  its  character  of  money,  an 
ordinary  commodity,  although  the  material  of  which  its  units 
are  made  may  be.  It  is  impossible  to  understand  the  use 
and  operation  of  money  upon  any  such  theory.  Money, 
moreover,  having  only  the  equivalent  of  purchasing  and 
paying  power,  cannot  be  a  tool,  as  it  is  sometimes  called, 
nor  can  it  give  rise  to  "  double  barter,"  for  it  was  devised 
in  order  to  get  rid  of  barter.  Money  and  the  circulation 
of  money  are  practically,  therefore,  one  and  the  same  thing ; 
the  units  of  money  in  the  shape  of  coin  and  bank-notes 
(credit  units  might  be,  but  now  are  not  used)  are  the  means 
of  effecting  the  circulation  of  money.  No  man  by  means  of 
a  sale  procures  gold  as  a  tool  to  enable  him  by  a  second 
and  further  use  of  the  tool  to  procure  what  he  wants.  He 
sells  for  money,  and  he  buys  with  money  ;  after  he  has 
sold  for  money  another  man  sells  to  him  for  money ;  after 
one  man  has  purchased  of  him  for  cash  he  purchases  of 


108 


POLITICAL  ECONOMY. 


another  man  for  cash ;  sales  offset  sales  and  purchases  offset 
purchases ;  one  man's  sale  is  another  man's  purchase,  and 
one  man's  purchase  is  another  man's  sale  ;  mutual  wants 
producing  mutual  action  and  reaction.  The  question,  then,  of 
price  absolutely  and  of  price  relatively,  of  high  prices  and 
low  prices,  and  of  steadiness  and  unsteadiness  of  prices, 
depends  directly  upon  the  number  of  units  of  money  circu- 
lated to  distribute  and  exchange  a  given  number  of  units  of 
commodities  and  capital.  If  a  large  amount  of  inconvertible 
paper,  much  larger  than  the  amount  of  convertible  money 
which  precedes  it,  as  in  the  United  States,  or  rather  more 
than  equaling  it,  as  in  France,  be  issued,  by  governments  or 
banks,  a  much  higher  range  of  prices  is  made  possible  ;  and 
if  additional  circulation  takes  place  —  that  is  to  say,  the  cir- 
culation of  an  additional  number  of  units,  as  in  the  United 
States,  by  reason  of  the  issue  of  them  by  government  —  a 
much  higher  range  of  prices  is  seen  ;  but  if  circulation  is 
not  increased  in  proportion,  and  the  metallic  money  retires 
largely  from  circulation,  as  in  France,  prices  may  continue 
comparatively  steady.  The  question,  then,  of  prices  under  a 
system  of  deposit  and  discount  banking,  developed  to  a 
high  degree,  as  in  England,  depends  upon  the  amount  of 
money,  that  is  to  say  the  number  of  units  of  money,  put  in 
circulation  and  kept  in  circulation  by  the  banks  ;  there  is  al- 
ways metal  enough  in  the  common  reserve  (as  it  may  well 
be  called)  in  the  Bank  of  England  to  pay  every  dollar 
demanded,  in  coin,  unless  in  case  of  panic  ;  the  amount  of 
possible  circulation  which  could  be  effected  by  means  of  this 
consolidated  fund  has  never  been  reached  ;  it  is  checked  by 
a  greater  power  than  any  power  existing  in  a  thing  like 
money,  which  has  only  conventional  value  ;  it  is  checked  by 
the  impossibility  of  making  sales  ;  the  exchanges  of  what 
has  been  and  is  being  produced,  for  the  units  of  conventional 
value  called  money,  are  blocked  ;  bank  loans  cannot  be  paid, 
and  production  is  brought  to  a  stand.  The  subjective  proc- 
ess of  the  circulation  of  money  is  controlled  by  the  objective 
and  paramount  influence  of  production,  distribution,  and  con- 
sumption.    Money  and  the  circulation  of  money  are  but 


BANKING  IN  ENGLAND. 


109 


means  to  an  end  ;  the  chief  end  is  consumption,  through  dis- 
tribution following  production ;  and,  therefore,  when  by  the 
operation  of  the  forces  at  work  consumption  is  checked,  cir- 
culation of  money  must  be  checked  also.  The  extent  of 
possible  i;ange  of  prices  upward,  under  a  fully  developed 
banking  system,  is  determined  by  the  total  number  of  units 
of  metal  or  paper,  or  both,  by  the  extent  of  possible  produc- 
tion by  means  of  bank  loans,  and  by  possible  consumption. 

Had  the  volume  of  inconvertible  paper  issued  by  the 
United  States  government  and  the  banks  during  and  after 
the  late  civil  war  been  onl\^  one  half  the  amount  actually 
issued,  or  had  the  energy  of  production,  and  therefore  bank 
loans,  been  equally  reduced,  the  range  of  prices  would  have 
been  much  lower,  and  possibly  not  more  than  seventy  or 
seventy -five  per  cent,  of  the  total  actually  reached. 

Moreover,  bank  credit,  when  convertible,  being  entirely 
the  result  of  the  original  deposit  of  metallic  and  paper  units, 
and  bank  debt  over  and  above  the  reserve  the  result  of  bank 
loans,  it  follows  that  the  total  of  bank  loans  shows  the  amount 
of  circulation  that  has  taken  place  to  pay  for  labor  and  ma- 
terials resulting  in  products  not  yet  consumed,  or  at  least  not 
sold  for  cash,  while  the  total  of  deposits  and  the  total  of 
reserve  taken  together  indicate,  with  unfailing  accuracy, 
the  condition  and  amount  of  circulation  inside  as  well  as 
outside  of  banks,  as  it  changes  from  time  to  time.  Circula- 
tion, therefore,  being  a  process  consisting  of  payments  into, 
out  of,  outside,  and  inside,  of  banks ;  if  hank  credits^  which 
are  the  result  of  loaning  out  deposits,  vary  without  regard 
to  bank  reserve,  they  necessarily  vary  also  without  regard 
to  the  metallic  circulation  going  on  outside  of  banks.  But 
as  the  whole  question  is  one  of  circulation,  and  as  there  has 
never  ^^et  been  found  any  limit  to  the  sufficiency  of  the  con- 
solidated fund  in  the  shape  of  reserve  to  supply  all  ordinary 
calls,  the  credits  in  bank  —  in  other  words  the  inscribed  debts 
of  record  due  from  banks,  and  resulting  from  bank  loans  — 
are  in  fact  so  many  powers  (equal  in  purchasing  power  to  a 
like  amount  of  coin  or  bank-notes  in  possession)  to  put  in 
circulation  from  time  to  time  a  like  amount  of  money  in  the 


110 


POLITICAL  ECONOMY. 


reserve ;  and  the  average  efficiency  of  these  powers  to  raise 
prices  depends  entirely  upon  the  average  amount  of  circula- 
tion, and  consequently  the  amount  of  exchanges  they  cause 
to  take  place  over  and  above  the  circulation  required  to  make 
the  exchanges  to  supply  consumption,  or  in  other  words  the 
efficient  demand  for  actual  use.  The  value  of  coin  as  money 
being  conventional,  and  lying  whoUy  in  its  purchasing  power, 
as  already  shown,  it  avails  only  as  a  unit  in  the  denominator 
of  the  ratio  of  price,  and  this  is  precisely  the  case  with  the 
bank-note ;  but  that  is  only  a  unit  evidenced  by  a  promise 
of  a  bank  or  banker  written  upon  it,  and  a  bank  credit  is 
precisely  the  same  thing,  except  that  it  differs  in  the  form 
of  the  promise.  In  the  nature  of  things,  therefore,  and  by 
the  most  rigorous  reasoning,  it  is  impossible  that  there  should 
be  any  intrinsic  difference  between  these  three  kinds  of  units 
in  point  of  purchasing  power.  Each  of  the  three  has  con- 
ventional value  only,  although  the  field  of  convention  is  the 
largest  for  the  metallic  units. 

The  development  of  circulation  through  deposit  and  dis- 
count banking  in  England,  has  therefore  —  through  the  proc- 
ess of  "  clearing,"  which  by  general  consent  could  be  effected 
as  well  without  as  with  a  metallic  reserve  —  furnished  a  prac- 
tical demonstration  of  the  proposition  which  I  have  already 
proved  directly  and  by  analysis,  that  gold  coin,  as  mone}^  is 
no  more  a  commodity  than  bank  credit  itself.  The  intrinsic 
value  of  gold  is  nothing  but  intrinsic  purchasing  power. 
Banks  might  be  established  without  any  reserve,  if  "clear- 
ings" for  all  exchanges  could  take  place  ;  and  we  should  then 
have  a  repetition  of  the  same  phenomena  in  England,  with 
perhaps  higher  range  in  prices,  until  at  last  the  payment  of 
money  for  raw  material,  skilled  and  common  labor,  and  ser- 
vices, were  rudely  checked ;  and  this  is  one  of  the  phenomena 
of  a  commercial,  industrial,  and  banking  crisis,  when  the  circu- 
lation is  metallic  as  well  as  when  it  is  not.  There  would  be, 
under  such  banks  without  reserve,  for  a  long  time,  a  descend- 
ing, as  there  had  been  for  a  considerable  time  before  an  as- 
cending, scale  of  prices,  and  there  Avould  then  be  for  a  short 
time  a  stationary  condition  of  prices,  and  the  cycle  would  then 


BANKING  IN  ENGLAND. 


Ill 


be  accomplished  as  it  had  been  before  with  gold.  Metallic 
money  has  thus  through  banking  not  only  practically  de- 
monstrated the  fact  that  it  is  not  a  commodity,  but  that  its 
use  may  lead  to  banking  crises,  as  well  as  the  use  of  credit ; 
the  amount  of  circulation  capable  of  being  effected  by  its 
units  being  the  same,  and  productive  of  the  same  effects,  as 
a  like  number  of  mere  paper  or  credit  units.  It  has  further 
shown  that,  prior  to  a  crisis,  even  when  it  constitutes  the 
circulation,  there  is  always  an  ascending  and  after  it  a  de- 
scending scale  of  prices,  with  no  more  steadiness  than  under 
a  system  of  currency  with  less  "  metallic  basis.'''' 

But  inasmuch  as  banking  has  practically  demonstrated 
the  proposition  proved  before  from  the  admitted  premises 
(conventional  value)  that  gold  coin  as  money  is  not  a  com- 
modity, and  that  clearings  might,  although  they  do  not,  take 
place,  without  any  banking  reserve,  when  the  whole  circu- 
lation is  by  supposition  units  of  bank  credit  only,  what  is  the 
nature  of  this  bank  credit  ?  Is  it  like  ordinary  mercantile 
credit,  or  is  it  like  nothing  but  itself  ?  The  hitter  unques- 
tionably. A  brief  analysis  will  demonstrate  the  truth  of  this 
proposition.  Abolish  all  money  in  the  shape  of  coin,  notes, 
and  credits,  restore  barter  and  bring  together  two  producers 
ready  to  exchange.  One  values  a  unit  of  his  commodity  as 
worth  two  of  the  other's,  and  the}^  exchange  accordingly. 
To  give  greater  efficiency  to  the  rude  exchange,  I  suppose 
the  two  producers  to  value  their  commodities  in  abstract 
units.  These  abstract  units  are  but  a  mode  or  process  of 
valuation  ;  it  differs  from  the  exchanges  of  our  time  in  the 
fact  that  two  commodities  are  required ;  and  without  the 
use  of  some  kind  of  money,  which  enables  us  to  dispense 
always  with  one  of  the  commodities,  and  put  in  its  place 
something  possessed  of  conventional  value,  we  should  be  com- 
pelled to  fall  back  upon  the  same  process.  All  the  ex- 
changes capable  of  being  effected  by  mere  personal  credit, 
and  such  is  mercantile  credit  (money  being  by  hypothesis 
non-existent),  are  but  barter  ;  the  moment  that  one  com- 
modity possessed  of  "  intrinsic  "  value  is  dispensed  with,  and 
something  possessed  of  conventional  value  takes  its  place. 


112 


POLITICAL  ECONOMY. 


and  thus  enables  us  to  dispense  with  the  former,  the  next 
moment  we  have  money.  Money  is  always  redeemed  with 
money  only  ;  personal  credit  is  never  redeemed ;  it  is  liqui- 
dated by  barter  or  money  ;  it  possesses  no  general  exchange- 
able and  conventional  value  like  money.  Hence  it  is  a 
monstrous  fallacy  to  assert  that  bank  credit,  or  bank  debt, 
whichever  we  call  it,  is  like  mercantile  credit.  A  bill  of 
exchange  may  be,  and,  indeed,  always  is,  used  in  interna- 
tional, as  it  would  be  in  national  trade,  in  the  absence  of 
banks.  It  is  generally  asserted  that  this  instrument,  of  itself, 
forms  a  species  of  mercantile  currency,  similar  to  the  credit 
currency  of  banks,  as  that  currency  is  sometimes  called.  A 
greater  fallacy  than  this,  abundant  as  financial  fallacies  are, 
scarcely  exists.  Has  a  bill  of  exchange  a  general  conven- 
tional value  or  purchasing  power  like  that  afforded  by  the 
units  of  bank  credit?  Is  it  redeemed,  that  is  to  say,  ex- 
changed through  redemptions,  always  for  itself,  as  money  is  ? 
If  it  be  so  redeemed,  then  it  follows  that  bills  of  exchange 
are  always  redeemed  with  bills  of  exchange ;  which  is  absurd 
and  impossible.  With  fallacies  of  this  sort,  generally  taken 
as  true  without  argument,  how  is  it  possible  to  form  any  def- 
inite opinion  of  the  active  cause  which  deranges  production 
and  distribution,  by  excessive  and  disproportioned  circula- 
tion, causing  an  ascending  scale  of  prices,  locking  up  prod- 
ucts in  overstock,  and  so  bringing  on  commercial,  banking, 
and  industrial  crises  ?  That  bank  credit  is  radically  differ- 
ent from  all  other  credit  can  also  be  plainly  demonstrated 
otherwise.  Suppose  banks  to  discount  no  paper  whatever, 
and  a  banker's  business,  instead  of  loaning  money,  to  be  a 
loaning  of  his  personal  credit  in  the  shape  of  indorsement  or 
guaranty  of  the  paper  of  producers,  both  manufacturers  and 
merchants ;  the  latter  belonging  undoubtedly  to  that  class, 
while  they  are  at  the  same  time  distributors  :  How  far  will 
this  guaranty  go  towards  paying  wages,  or  buying  raw  ma- 
terial ?  Is  any  conventional  value  attached  to  such  a  guar- 
anty, and  would  it  pay  wages  ?  By  no  means.  No  over- 
stock could  be  created,  therefore,  and  no  banking,  commercial, 
and  industrial  crises  brought  about,  by  the  aid  of  such  guar- 


BANKING  IN  ENGLAND. 


113 


anties.  But  could  general  conventional  value  be  given  to 
such  guaranties,  so  as  to  make  tliem  pass  as  money,  pay- 
wages  and  buy  raw  material  ?  It  certainly  might,  by  com- 
mon consent,  evidenced  by  common  practice  ;  and  then  if  the 
paper  were  divided  in  suitable  amounts,  it  would  be  used 
precisely  as  bank-notes  are  now.  It  would  be  no  longer 
mercantile  credit  alone,  but  mercantile  credit  backed  by 
banker's  credit,  or,  more  properly,  banker's  credit  protected 
by  mercantile  credit.  But  would  the  merchants  be  called 
upon  to  redeem  such  paper  ?  Certainly  not,  except  in  case 
of  the  banker's  failure.  There  would  be  no  possibility  of 
redemption  by  the  merchants.  Money  must  always  be  re- 
deemed in  some  mode  ;  the  exchanges  would  still  be  effected 
through  the  banks,  and  if  not  altogether,  then,  so  far  as  a  few 
merchants  might,  if  by  any  possibility  they  could  mutually 
clear,  the  principle  would  be  the  same.  Therefore  it  is  a 
great  fallacy  to  call  bank  credit  the  equivalent  of  ordinary 
mercantile  credit,  because  labor  and  material  could  not  be 
paid  for  by  credit;  circulation  could  not,  by  credit,  be  in- 
creased beyond  its  natural  limits,  through  the  distribution 
of  commodities,  nor  general  prices  placed  in  the  ascending 
scale  by  means  of  increased  circulation.  Hence  there  could, 
by  means  of  credit  alone,  without  money,  be  no  banking  and 
commercial  crises. 

Logically  and  historically,  therefore,  I  repeat,  the  units  of 
bank  credit  are  not  money,  while  at  the  same  time  they  do 
not  and  cannot  take  the  place  of  money  as  mere  credits. 
They  are  powers  to  put  in  circulation  the  metal  in  reserve ; 
metal  belonging  to  the  common  fund  being  present  in  abun- 
dant quantity  to  answer  all  ordinary  calls.  It  is  absolutely 
true^  nevertheless,  that  banking  has,  by  its  development, 
practically  demonstrated  the  truth  of  the  proposition  that 
the  units  of  bank  credit  can  be  used  as  money  without  any 
reserve,  either  of  metal  or  paper,  because  all  money  of  every 
kind  necessarily,  by  the  very  fact  of  its  adoption  and  use, 
develops  into  a  series  of  units  limited  in  number  by  the 
material  of  which  they  are  made,  or,  in  the  case  of  bank- 
notes and  units  of  bank  credit,  by  the  commodities  they 
8 


114 


POLITICAL  ECONOMY. 


cause  to  be  produced ;  and  all  such  units  are  money  quite 
as  absolutely  as  the  units  of  metal,  although  they  possess 
a  smaller  field  of  circulation.  But  such  units  never  can  be 
used  safely  alone  without  being  limited  by  a  duly  propor- 
tioned reserve.  There  would  always  be  an  ascending  fol- 
lowed by  a  descending  scale  of  prices,  precisely  as  now  in 
England  and  the  United  States.  The  range  would  be  higher 
and  lower  in  both  countries  if  gold  were  eliminated  entirely 
from  banking  and  redemption  reserves,  but  the  cause  which 
creates  and  brings  into  existence  a  rising  and  falling  scale  of 
prices  would  be  the  same  in  both  cases.  The  true  object  of 
a  reserve  is  to  put,  not  an  indefinite,  but  a  well  defined 
limit  to  the  expenditure  of  labor  for  purposes  other  than  the 
production  of  absolute  necessaries  ;  to  keep  a  due  proportion 
of  labor  at  and  near  the  base  line  of  production.  An  ex- 
cess of  laborers  in  towns,  cities,  and  villages  is  thus  pre- 
vented, as  far  as  it  can  be,  by  forcing  more  of  them  to 
remain  at  the  plow  in  order  to  earn  their  bread.  The  pro- 
duction of  relative  necessaries  is  thus  limited  by  limiting 
bank  loans.  As  shown  elsewhere,  a  fixed  ratio  of  reserve  to 
liabilities  is  requisite  to  effect  this  object. 

What  purpose,  then,  does  a  metallic  reserve  answer  in  Eng- 
land and  the  United  States  ?  I  postpone  the  answer  to  this 
question  until  I  have  answered  another.  What  causes  the  rise 
and  fall  of  prices  even  under  the  metallic  circulation  of  Eng- 
land with  a  large  metallic  reserve  ?  One  thing  is  certain,  that 
the  rise  and  fall  are  subjective  and  not  objective  ;  they  have 
no  causative  power ;  they  are,  on  the  other  hand,  the  effects  of 
some  grand  cause,  and  that  they  are  merely  effects,  appears 
clearly  from  the  fact  that  there  is  no  change  in  the  power  of 
the  banks,  abstractly  considered,  to  cause  money  to  be  put 
in  circulation  after  a  crisis  appears.  There  is,  nevertheless, 
the  same  amount  of  money  to  be  had  when  prices  are  fall- 
ing as  when  they  are  rising.  A  power  greater  than  money 
causes  the  ascending  scale  as  well  as  the  descending  one ;  that 
power  is  Productive  Power  on  a  general  scale ;  it  is  no  trifling 
cause  which  produces  such  gigantic  results.  This  grand 
cause  I  have  examined  at  large  in  other  chapters,  and  can 


BANKING  IN  ENGLAND. 


115 


only  briefly  refer  to  it  now.  There  can  be  no  excess  of  the 
necessaries  of  life ;  such  excess  is  impossible,  but  there  can 
be  a  relative  and  temporary  excess  of  the  products  of  labor 
in  other  directions ;  improved  machinery  tends  to  increase 
the  excess,  and  tariffs  and  taxes  help  to  diminish  the  power 
to  consume  relative  necessaries  on  the  part  of  the  producers 
:of  absolute  necessaries,  because  the  consumers  of  tariffs  and 
taxes  consume  more  in  proportion  of  absolute  than  of  relative 
necessaries.  This  is  all  the  truth  there  is  in  the  assertion 
that  taxes  fall  chiefly  on  land. 

It  would  be  attributing  gigantic  results  to  causes  wholly 
incapable  of  producing  them  to  affirm  that  improved  machin- 
ery, and  tariffs  and  taxes,  cause  overstock  on  the  part  of  the 
relative  necessaries  of  life,  sufficient  to  bring  on  a  commer- 
cial crisis.  It  is  not  true  absolutely  that  there  can  be  no  over- 
production ;  it  is  relatively  true  only.  It  is  absolutely  true 
that  there  can  be  no  excess  of  the  absolute  necessaries  of  life, 
and  therefore  it  follows  that  on  the  average  there  can  be  no 
excess  of  relative  necessaries.  In  the  operation  of  this  law 
it  appears  that  although  the  energy  of  production  be  applied 
in  the  fullest  manner  possible  in  every  direction,  there  will 
still  be  a  comparatively  steady  result  in  respect  to  absolute 
necessaries,  that  kind  of  production  being  always  abreast  of 
but  not  in  advance  of  population,  while,  production  of  the 
other  sort  tends  to  move  in  advance  of  production  of  absolute 
necessaries,  as  well  as  population,  in  the  most  advanced  na- 
tions. I  have  shown  that  raw  material  and  labor  could 
not  be  paid  for  by  credit  only ;  but  suppose  that  they  could ; 
an  equilibrium  of  all  production  would  nevertheless  be  fairly 
maintained  by  credit  for  these  conclusive  reasons  :  The  very 
moment  an  overstock  began  to  take  place  in  any  kind  of 
production,  whereby  the  exchanges  were  likely  to  be  blocked, 
that  very  moment  the  producer  would  be  compelled  to  stop. 
The  co-factors,  depreciation  of  overstock,  loss  by  payment  of 
interest,  rise  of  necessaries  of  lif^,  and  inability  to  borrow 
purchasing  power  of  any  kind,  would  soon  bring  the  ex- 
changes to  par. 

Price  has  no  existence  aside  from  the  use  o»f  units  of  val^ 


116 


POLITICAL  ECONOMY. 


nation  or  purchasing  power,  passed  from  buyer  to  seller,  and 
without  such  nnits,  inasmuch  as  there  can  be  no  price,  there 
can  be  no  rising  or  falling  scale  of  prices ;  and  without  a  ris- 
ing scale  of  prices,  by  means  of  an  expanding  circulation, 
there  can  be  no  loss  from  overstock,  and  hence  no  overstock. 
There  are  three  kinds  of  circulation  :  1st.  That  of  the  compar- 
atively primitive  and  simple  community,  where  but  little 
money  is  borrowed,  and  that  which  is,  is  borrowed  merely  to 
anticipate  future  income,  and  supply  immediate  wants ;  it  is 
not  borrowed  to  expend  in  production  or  speculative  under- 
takings, in  expectation  of  profit,  and  hence  in  such  a  com- 
munity usury  is  looked  upon  with  abhorrence.  2d.  That 
additional  circulation  of  an  advanced  and  highly  civilized 
country,  like  France  for  instance,  where  capital  and  what 
always  accompanies  it,  money,  have  largely  increased,  and 
loans  of  money  are  made  to  producers  of  all  kinds,  mer- 
chants included  ;  but  there  is  no  artificial  stimulus,  or  but 
comparatively  little  at  least,  given  to  the  circulation  of 
money,  and  hence  production  by  the  aid  of  banks.  This 
additional  circulation,  however,  created  by  loans  from  indi- 
viduals, may  be  very  properly  called,  on  its  money  side,  ex- 
pansion of  circulation,  growing  out  of  the  development  and 
increased  civilization  of  mankind.  Will  such  an  expansion 
of  circulation,  and  therefore  of  production,  give  rise  to  a  de- 
rangement or  blocking  of  the  exchanges,  by  creating  an  ex- 
cess of  the  products  of  labor,  relative  only  to  civilized  wants  ? 

By  no  means,  certainly  to  no  great  extent,  if  the  money 
units  are  metallic,  because  all  the  units  of  money  in  the 
hands  of  capitalists,  waiting  to  be  loaned,  have  come  back 
to  them  in  consequence  of  a  like  amount  of  commodities 
which  have  been  actually  exchanged  for  consumption,  and 
because  they  cannot,  without  the  aid  of  banks,  be  put  in 
circulation  to  pay  for  labor  and  material,  as  a  general  rule, 
often  enough  to  produce  an  industrial  and  commercial  crisis. 
A  sufficient  stock  undoubtedly  will  be  created  by  loaning 
them  as  fast  as  called  for,  to  supply  consumption  through 
commerce;  there  will  be  more  or  less  advance  of  prices,  and 
afterwards  fall  of  prices,  according  to  the  state  of  demand 


BANKING  IN  ENGLAND. 


117 


and  supply ;  because  with  an 5^  kind  of  money  or  conventional 
value  this  is  unavoidable,  but  the  ratio  of  variation  will  be 
very  moderate ;  there  can  hardly  be  a  commercial  crisis,  but 
should  one  occur,  it  must  arise  from  exceptional  and  not 
permanent  causes.  The  expansion  of  circulation  through 
loans,  if  not  met  and  counteracted  by  an  equal  contraction  of 
circulation  by  payment  of  loans,  undoubtedly  creates  a  rising 
scale  of  prices,  and  leads  to  an  undue  expansion  of  production 
in  one  or  more_  quarters  and  rise  of  prices ;  but  the  sale  of 
what  is  produced  takes  place  within  short  periods,  and  thus 
enables  loans  to  be  paid,  and  the  expansion  of  circulation 
caused  by  money  paid  out  for  labor  and  material,  resulting 
in  a  product  not  yet  consumed,  is  met  within  safe  periods  by 
a  sale  and  consumption  of  the  product  and  payment  of  the 
loans.  The  contraction  of  production  by  consumption  ac-' 
companies  or  precedes  a  corresponding  contraction  of  circu- 
lation. English  banks  do  not  deal  in  anything  like  mercan- 
tile credit ;  for  a  commercial  and  therefore  a  banking  crisis 
is  impossible  through  the  use  of  such  credit.  If  there  is  any 
proposition  in  economical  science  which  can  be  demonstrated 
with  a  certainty  almost  mathematical  this  is  one.  It  is 
equally  certain  that  metallic  money,  left  to  itself  without 
banks,  furnishes,  through  the  co-factors  before  mentioned, 
the  same  protection  against  want  of  harmony  in  production 
with  mercantile  credit  itself,  could  that  be  used  instead  of 
money,  in  highly  advanced  communities.  Prices,  on  the 
other  hand,  ascend  and  descend  regularly  ;  expand  and  con- 
tract under  the  loans  of  deposit  and  discount  banks,  where 
metallic  money  is  in  use  as  in  England,  and  commercial 
and  banking  crises  follow.  I  will  now  answer  the  question : 
What  purpose  does  a  metallic  reserve,  as  actually  kept,  an- 
swer in  England  and  the  United  States  ?  It  limits  the  range 
of  variation  in  prices  caused  by  bank  loans,  even  when  its 
ratio  to  loans  is  in  a  state  of  constant  variation  upward  or 
downward,  although  steady  prices  can  only  be  obtained  by 
a  ratio  ranging  within  short  periods,  and  to  a  slight  extent 
only.  Higher  prices  are  attained  with  inconvertible  than 
with  convertible  notes,  as  witness  deposits  in  the  Bank  of 


118 


POLITICAL  ECONOMY. 


England  between  1797  and  1816,  compared  with  preceding 
and  succeeding  periods,  but  the  subsequent  contraction  of 
loans,  even  before  convertibility  is  reached,  where  a  crisis 
has  taken  place  in  production,  makes  the  ratio  of  variation 
the  same  as  under  a  convertible  or  even  a  metallic  currency. 
General  results  are  the  same,  whether  the  currency  be  con- 
vertible or  inconvertible  ;  there  is  the  same  rise  of  prices, 
productive  of  the  same  mistakes  on  the  part  of  producers, 
and  there  is  afterwards  the  same  fall ;  for  take  now  the  third 
kind  of  circulation  as  we  actually  find  it  in  England  with 
a  full  development  of  the  only  machinery  capable  of  arti- 
ficially increasing  the  amount  of  circulation  of  metallic 
money,  not  only  beyond  its  natural  limits  in  those  cases 
where  no  loans  are  made  for  the  purposes  of  production 
in  a  primitive  community,  but  even  much  beyond  the  limits 
possible  by  means  of  ordinary  loans  for  the  purposes  of 
production,  as  in  France,  without  banks.  When  the  ascend- 
ing scale  of  bank  loans  begins,  and  increases  above  average, 
and  prices  rise,  to  what  use  are  the  loans  applied?  Not 
to  consume  certainly,  but  to  produce.  Banks  do  not  loan 
to  mere  consumers,  or  to  adventurers  who  dig  holes  in  the 
ground  or  erect  pyramids,  but  t(3  producers  of  some  kind. 
Suppose  a  loan  made  to  a  wholesale  merchant  in  domestic 
trade ;  he  is  both  a  producer  and  distributor,  for  he  produces 
value  by  distributing.  But  there  is  a  progressive  rise  in  the 
ascending  scale  of  prices ;  it  continues  until  a  crisis  takes 
place,  and  the  ascent  in  the  scale  of  prices  changes  to  a  de- 
scent. What  is  the  precise  effect  of  that  rise  ?  To  speak 
with  rigorous  accuracy  it  has  but  one,  but  that  a  most  potent 
effect.  It  masks  the  real  depreciation  of  the  unsold  products 
of  labor  (which  are  not  sold  to  pay  loans,  because  they  cannot 
be)  under  the  guise  of  apparent  appreciation,  and  therefore 
profit.  A  merchant  buys,  and  the  products  of  labor  are  ap- 
parently rising  on  his  hands  ;  he  buys  by  the  aid  of  a  bank 
loan,  and  the  loan  results  in  an  increase  of  bank  debt,  or  a 
loss  of  bank  reserve  by  the  difference  between  the  cost  of  the 
labor  and  materials,  represented  by  a  loan  to  the  manufact- 
urer, and  the  cost  and  profit  paid  to  the  manufacturer  by  the 


BANKING  IN  ENGLAND. 


119 


same  merchant;  and  so  as  to  all  other  producers,  whether 
they  stand  in  the  first  rank  or  in  a  rank  intermediate  between 
the  first  producer  and  consumer.  It  is  all  founded  on  credit, 
apparently,  and  a  kind  of  credit  whose  units  circulate  as 
money.  Money  itself  being  simply,  when  actually  used,  but 
a  series  of  units,  these  credit  units  are  the  same  in  effect  as 
any  other  units.  The  contraction  of  this  circulation,  corre- 
sponding to  and  resulting  from  consumption,  takes  place  in  its 
first  act  by  transfers  of  bank  credit  through  clearing  ;  and  is 
consummated  by  the  contraction  of  bank  debt  or  the  increase 
of  bank  reserve  which  takes  place,  for  the  most  part,  after- 
wards, at  another  clearing,  by  those  to  whose  credit  the  trans- 
fers are  made ;  so  that  every  clearing  causes  a  certain  amount 
of  contraction  to  take  place  corresponding  to  the  contraction 
of  circulation  which  takes  place  by  the  payment  of  coin  to 
a  lender  in  France ;  and  the  contraction  of  circulation  in  this 
case,  whether  the  units  are  composed  of  credits  canceled  or 
coin  deposited,  is  accompanied  by  a  corresponding  contraction 
in  the  volume  of  commodities,  whose  sale  and  consumption 
enable  this  contraction  of  circulation  to  take  place.  It  is 
absolutely  true,  however,  that  all  loans  and  all  redemptions 
are  made  out  of  reserve  only,  because  by  every  loan  is  the 
ratio  of  reserve  to  debt  diminished.^  By  the  abandonment 
of  all  theories,  and  by  rigorously  adhering  to  the  premises 
in  which  lies  no  lurking  fallacy,  viz,  that  all  money  is  con- 
ventional only,  and  therefore  consists  of  a  series  of  units, 
whether  those  units  be  evidenced  by  weight  units  of  metal, 
notes,  or  credits,  it  can  be  shown  that  prices  depend  upon 
production,  consumption,  and  circulation.  The  demonstra- 
tion, from  the  admitted  premises,  that  all  circulation  is  the 
use  of  a  series  of  units  of  conventional  value,  is  verified  by 
the  practical  demonstration  of  the  same  fact  by  the  aid  of 
clearing ;  because  while  there  is  always  an  abundance  of  gold 
in  the  consolidated  reserve  to  pay  every  check-holder,  clearing 

1  Whenever  it  is  affirmed  in  this  chapter,  or  elsewhere  in  this  work,  that 
units  of  bank  debt  or  credit  are'circulated  or  paid,  it  is  affirmed  hypothetically 
with  the  intention  of  showing  that  even  upon  the  hypothesis,  without  a  fixed 
ratio  of  reserve  in  silver  or  gold,  there  is  no  metallic  limitation  of  loans  by 
the  reserve  —  such  a  limitation  being  in  true  science  its  most  important  office. 


120 


POLITICAL  ECONOMY. 


is  rendered  possible  only  by  the  fact  that  the  check-holders 
would,  were  they  to  withdraw  gold,  immediately  redeposit 
in  the  consolidated  fund.  Hence  the  excessive  and  unlim- 
ited circulation  of  gold  units  themselves  is  precisely  equiva- 
lent to  the  circulation  of  a  like  amount  of  units  of  bank 
credit.  In  the  ratio  of  price^  both  are  mere  units  and  noth- 
ing more.  Stability  of  prices,  therefore,  does  not  depend  at 
all  upon  whether  the  buj^er  pays  with  gold  coin,  the  mate- 
rial of  which  only,  and  not  the  coin  in  its  character  of  money, 
is  a  commodity,  or  with  units  of  bank-notes  or  bank  credits, 
or  —  were  it  an  actual  fact  that  they  are  so  used  —  commer- 
cial-credit units. 

One  more  important  fact  or  law,  whichever  we  choose  to 
call  it,  if  thoroughly  understood  and  pondered, -will  enable 
one  to  comprehend  the  immense  forces  at  work,  in  bringing 
on  commercial  crises. 

If  we  suppose  the  existence  of  a  community,  all  of  whose 
members  are  in  possession  of  undoubted  credit,  and  whose 
commerce  lies  entirely  within  itself,  each  member  upon  pur- 
chasing a  commodity  could  give  his  own  notes^  payable  in 
notes  issued  by  other  members,  or  in  commodities,  at  the 
option  of  the  holder.  If  these  notes  by  general  consent  evi- 
denced by  common  usage  were  never  issued  by  any  member 
in  excess  of  commodities  shortly  thereafter  produced  by  him- 
self, or  purchased  with  like  notes  issued  by  others,  no  produc- 
tion taking  place  in  excess  of  the  wants  of  the  community, 
prices  under  this  paper  currency  would  be  steady.  Prices 
would  be  steady  because  the  units  of  money  circulated  could 
not  be  in  excess  of  the  units  of  commodities.  The  contrac- 
tion of  commodities  taking  place  by  the  purchase  of  one  com- 
modity for  consumption  would  be  soon  met  by  a  correspond- 
ing expansion  of  commodities  by  means  of  the  purchaser's 
production,  and  which  another  purchaser  is  waiting  for ;  and 
the  expansion  of  circulation  which  he  caused  to  take  place, 
by  paying  out  his  own  notes,  made  and  issued  by  himself,  in 
exchange  for  the  commodity  he  bought  and  consumed,  would 
be  soon  met  and  balanced  by  a  corresponding  contraction  of 
pirculation  through  a  like  number  of  units  of  notes  paid  him 


BANKING  IN  ENGLAND. 


121 


by  another  member  of  the  community  for  another  commod- 
ity which  he  had  produced  since  his  purchase.  To  take  the 
place  of  the  commodity  he  purchased  and  consumed  he  would 
produce  and  sell  another  of  a  like  value,  and  so  production 
and  consumption  would  balance.^  He  would  cause  an  ex- 
pansion of  circulation  by  issuing  his  own  notes,  and  he 
would  cause  a  corresponding  contraction  of  circulation  by 
taking  back  an  equal  number  of  units  in  notes ;  it  may 
be  the  notes  issued  by  himself ;  it  may  be  notes  issued  by 
others.  In  either  case  expansion  of  circulation  is  balanced 
by  a  corresponding  contraction,  because  the  receipt  of  the 
units  thus  paid  him,  whether  his  own  issue  or  another's, 
retires  his  former  issue,  and  they,  whether  his  own  or  anoth- 
er's, can  be  used  only  on  the  next  similar  occasion  with 
like  effect ;  and  thus  there  is  no  expansion  of  circulation 
without  a  corresponding  contraction  occurring  soon  after- 
wards. Hence,  by  the  most  rigorous  demonstration,  it  ap- 
pears that  paper  units  will  maintain  an  equilibrium  or  stead- 
iness of  prices  so  long  as  every  member  of  the  community 
can  sell  what  he  produces  within  short  periods.  It  "further 
appears  that  high  and  low  prices  come  from  the  production 
of  those  things  which  will  not  sell ;  because,  could  they  be, 
and  were  they  sold,  the  sales  would  produce  a  corresponding 
contraction  of  circulation.  Moreover,  the  phenomena  of  ris- 
ing and  faUing,  or  high  and  low  prices,  accompany  com- 
mercial crises ;  therefore  it  is  a  fair  inference,  or  rather  it 
furnishes  demonstration  in  fact,  that  such  crises  come  from 
the  impossibility  of  realizing  upon  some  of  the  products  of 
labor ;  and  inasmuch  as  there  is  a  banking  phase  to  every 
crisis,  the  production  whose  products  will  not  sell  must  have 
come  from  bank  loans.  But  of  this  I  can  furnish  actual  cer- 
tainty by  demonstration.     Why  do  general  prices  rise  ? 

1  Expansion  of  circulation  by  bank  loans  occurs  by  payments  for  lab6r  and 
raw  material,  and  therefore  for  ])roduction  in  advance  of  consumption ;  the 
latter  must  come  in  due  time  in  order  to  balance  the  former.  In  the  case  sup- 
posed in  the  text  no  expansion  of  circulation  occurs  until  production  has  act- 
ually taken  place,  but  the  expansion  nevertheless  continues  until  it  is  balanced 
by  means  of  an  equal  amount  of  consumption  following  an  equal  amount  of 
production. 


122 


POLITICAL  ECONOMY. 


Not  from  personal  credit,  as  I  have  already  shown,  but  from 
increased  expansion  of  circulation  which  is  not  balanced  by 
a  corresponding  contraction. 

In  the  case  supposed,  no  money  was  paid  out  and  not  a 
note  was  issued  until  a  commodity  was  not  only  produced 
but  actually  sold  for  consumption.  Suppose  the  community 
to  have  progressed  so  far  as  to  have  manufacturing  establish- 
ments ;  suppose  the  manufacturers  to  pay  for  labor  and  ma- 
terial with  their  own  notes,  and  the  merchants  who  buy  of 
them  to  do  the  same.  Will  prices  remain  steady  as  before, 
or  will  there  be  a  rising  scale  to  be  followed,  as  it  always  is, 
by  a  falling  one  ?  That  will  depend  upon  the  existence  or 
non-existence  of  one  important  fact. 

If  production  and  consumption  balance,  then  the  expansion 
and  contraction  of  circulation  will  balance,  and  for  the  same 
reason  as  before.  If,  however,  production  is  ahead  and  not 
abreast  of  consumption,  there  will  be  a  rising  scale  of  prices ; 
the  money  paid  out  for  labor  and  materials  will  only  come 
back  to  the  manufacturers  or  merchants  in  proportion  to 
what  they  can  sell.  Meantime  the  money  which  they  have 
paid  out  in  the  shape  of  their  own  notes,  for  that  portion  of 
the  products  of  labor  and  raw  material  which  will  not  sell, 
has  gone  into  general  circulation,  and  has  thus  necessarily 
increased  the  prices  of  all  things  consumed.  The  volume  of 
the  things  consumed  may  be  considerably  expanded,  but  the 
units  of  money  will  be  expanded  much  more.  If  the  volume 
of  production  by  manufacturers  is  twenty-five  per  cent,  in  ad- 
vance of  consumption,  precisely  to  that  extent  is  the  expan- 
sion of  circulation  in  advance  of  contraction.  Every  unit  of 
the  commodities  thus  expanded  by  twenty-five  per  cent,  has, 
by  expanding  circulation,  advanced  general  prices  largely, 
although  not  necessarily  to  the  extent  of  twenty-five  per  cent. 
Whil^  the  scale  of  production  was  ascending  that  of  prices 
was  also  ascending.  Moreover,  this  production  did  not  in- 
clude the  absolute  necessaries  of  life,  but  only  those  things 
relating  to  civilization  and  progress.  Again,  the  rising  and 
falling  scale  of  prices  did  not,  in  this  particular  case,  result 
from  the  fact  that  the  units  of  money  were  evidenced  by 


BANKING  IN  ENGLAND. 


123 


paper  promises  instead  of  metallic  cylinders  of  gold  or  sil- 
ver ;  it  resulted  entirely  from  the  fact  that  an  overproduction 
of  relative  as  compared  with  absolute  necessaries  being  pos- 
sible by  means  of  money  in  shape  of  notes,  the  intrinsic  qual- 
ities of  the  money,  whether  paper  or  metal,  were  not  es- 
sential. The  material  inquiry  was.  Is  it  not  easier  to  issue 
units  of  paper  money  to  pay  for  labor  and  raw  material  to 
produce  in  advance  of  consumption  than  to  obtain  by  sales 
units  of  metal  in  the  absence  of  banks  ?  For,  under  deposit 
and  discount  banking,  even  with  a  metallic  currency,  loans 
can  be  obtained  as  readily  as  with  a  currency  of  bank-notes. 
It  was  an  expansion,  in  the  case  supposed,  of  circulation  for 
all  the  manufacturers'  production  which  took  place,  and  a 
contraction  only  for  the  consumption  which  took  place :  the 
expansion  of  possible  circulation,  not  balanced,  was  therefore 
precisely  equal  to  the  difference  between  production  and  con- 
sumption. Hence,  where  money  is  only  loaned  to  producers, 
as  is  unquestionably  the  case,  for  the  most  part,  in  England 
and  elsewhere,  the  fact  that  gold  is  loaned,  either  actually 
or  representatively,  to  pay  for  labor  instead  of  bank-notes, 
whether  convertible  or  not,  does  not,  by  reason  of  the  gold, 
maintain  steady  prices ;  nor,  on  the  other  hand,  does  it  cause 
unsteady,  rising,  or  falling  prices ;  the  unsteadiness  is  pro- 
duced by  a  cause  paramount  to  the  kind  of  money-unit  em- 
ployed, and  which  has  been  already  described.  But  in  Eng- 
land bank  credits  determine  the  amount  of  metallic  units  in 
circulation,  instead  of  the  latter  determining  the  former.  In- 
stead,  therefore,  of  metallic  units  controlling  the  volume  of 
credit  units,  the  latter  control  the  former,  and  in  this  manner 
the  design  of  the  Bank  Act  has  failed.  Is  the  unit  of  gold, 
then,  under  deposit  and  discount  banking,  any  better ;  has  it 
any  more  potency  in  maintaining  steady  prices  than  the  unit 
of  bank  credit  or  bank-notes,  the  latter  two  being  equiva- 
lents ?  It  must  be  confessed  that  it  has  not,  in  England, 
under  deposit  and  discount  banking. 


124 


POLITICAL  ECONOMY. 


THE   BANK  ACT   OF  1844  HAS  FAH.ED  ;  AND   WHY?  IS 
THERE  A  REMEDY? 

The  paramount  advantage  of  a  circulation  consisting  of 
gold,  or  gold  and  silver  units,  is,  confessedly,  steadiness  or 
uniformity  of  prices.  Safety  to  the  holder  is  undoubtedly 
an  object  gained  to  a  considerable  extent  by  gold  and  silver 
coin,  but  in  England  it  has  been  practically  demonstrated 
that  the  notes  of  the  Bank  of  England  are  deemed  amply 
safe,  because  in  the  very  midst  of  a  banking  panic  nothing 
better  is  asked.  Therefore  I  affirm  that  in  England  stead- 
iness is  the  object  sought  by  the  use  of  metallic  circulation 
outside  of  banks.  But  it  is  very  certain  that  the  object  has 
not  been  attained ;  for,  beyond  all  question,  there  has  been 
a  constant  succession  of  rising  after  falling  and  falling  after 
rising  prices  since  the  Act  of  1844  was  passed.  This  varia- 
tion in  prices  arose  from  ill-balanced  production  and  from  no 
other  cause.  I  proceed  to  demonstrate  this  proposition  in 
another  form.  In  the  community  before  mentioned,  after 
the  manufacturers  began  to  pay  out  their  own  notes  for  labor 
and  raw  material  these  notes  were  money,  because  they  had, 
by  the  consent  and  practice  of  the  community,  conventional 
value  in  exchange  —  in  other  words,  purchasing  and  paying 
power.  Their  circulation  had  the  same  effect  precisely  in 
the  denominator  of  the  ratio  of  price  as  a  like  amount  of 
circulation  accomplished  by  the  use  of  a  like  number  of  units 
of  gold.  Now  in  order  to  understand  this  reasoning  clearly, 
it  must  first  not  only  be  demonstrated  that  money  in  the 
shape  of  gold  coin  and  in  its  character  of  money  is  not  a 
commodity  in  the  proper  meaning  of  that  word,  but  the 
truth  of  the  demonstration  must  be  clearly  perceived,  and  I 
therefore  proceed  to  prove  the  proposition  again  in  another 
form.  In  the  first  place  the  development  of  banking  in 
England  has,  as  already  shown,  practically  proved  it.  Gold 
or  bank-notes  representing  a  like  amount  of  gold  are  always 
on  hand  to  answer  every  call  by  check ;  if  not  paid  out  it  is 
because  the  gold  would  immediately  be  redeposited  by  or  for 
the  check-holder,  in  the  same  common  reserve,  and  if  by 


BANKING  IN  ENGLAND. 


125 


common  consent  all  the  gold  were  removed  from  the  com- 
mon reserve,  and  units  of  bank  credit  circulated  through 
checks,  the  result  would  be  forever  and  always  the  same,  as 
to  the  ratio  of  variation  in  prices.  Therefore  the  units  of 
bank  credit,  as  counted  in  bank  credit,  are  precisely  the  same 
as  the  units  of  gold  coin  in  the  reserve  counted  in  gold  coin : 
in  the  ratio  of  price  each  counts  out  mere  units  and  nothing 
more,  whether  the  count  of  units  of  valuing,  purchasing,  and 
paying  power  is  accomplished  by  gold  or  credit.  By  the 
manner  of  conducting  banking  in  England,  then,  it  is  practi- 
cally demonstrated  that  units  of  credit  control  the  units  of 
gold.  But  to  make  it  still  plainer,  perhaps,  to  some  minds, 
that  gold  coin  in  its  character  of  money  is  not  a  commodity, 
suppose  all  banks  in  France  out  of  the  way,  the  circulation 
wholly  metallic,  and  the  consolidation  in  a  bank  (of  deposit 
simply)  of  all  the  money  reserves  of  every  business  man  and 
capitalist  in  Paris.  Suppose  the  fund  to  be  one  thousand 
millions  of  francs.  Twenty-five  per  cent,  or  less  of  this 
amount  would  sufiice  to  answer  the  actual  demands  of  depos- 
itors, and  the  rest  might  be  permanently  locked  up.  Could 
it  be  used  by  any  but  the  owners  to  accomplish  their  own 
and  only  their  own  circulation  ?  Doubtless  it  could,  in  the 
way  of  loans,  and  the  economy  of  metal  required  to  pay  de- 
positors would  be  the  same  as  an  increase  of  metal  to  the 
amount  economized.  Now  if  gold  and  silver  coin  were  really 
commodities  this  could  never  take  place.  The  amount  econ- 
omized being  equivalent  to  the  production  of  a  like  amount 
of  metal,  a  part  of  the  metal  economized  or  an  equal  amount 
in  bullion  will  be  manufactured  and  another  part  retained  as 
coin,  so  as  to  maintain  the  same  ratios  between  metal  coined 
and  metal  not  coined  as  would  result  had  the  amount  econo- 
mized been  added  by  mining  to  the  world's  stock  instead  of 
being  economized.  In  other  words,  the  number  of  units  of 
weight  in  coin  determines  the  units  of  weight  that  are  used 
as  a  commodity.  The  number  of  units  of  valuing,  purchas- 
ing, and  paying  power  which  all  the  coin  in  the  world  if 
counted  would  sum  up  determines  the  quantity  of  metal 
manufactured,  the  metal  economized  being  equivalent  to  so 


126 


POLITICAL  ECONOMY. 


much  produced.  Once  more :  suppose  all  banks  in  England 
to  have  a  reserve  of  thirty-three  and  one  third  per  cent.  For 
every  one  thousand  pounds  in  money  deposited  and  circu- 
lated there  is  one  third  of  that  amount  in  gold  in  the  reserve. 
Clearing  would  take  place  precisely  as  now,  and  might  take 
place  if  the  banks  were  in  possession  of  twice  the  amount  of 
gold.  But  credit  or  debt  units  alone  appear^  and  the  result 
is  the  same  as  if  the  gold  coin  were  in  all  cases  actually  paid 
out.  The  real  difference  between  this  kind  of  banking  and 
banking  as  it  actually  is  in  England  consists  not  in  the  kind 
of  units  used  ;  gold  is  on  hand  in  sufficient  amounts  to  an- 
swer actual  calls,  in  both  cases ;  but  in  the  first  case  the 
amount  and  number  of  credit  units  are  controlled  by  the 
number  of  gold  units  behind  them ;  in  the  actual  case,  as  we 
find  it,  the  number  of  gold  units  is  entirely  controlled  by 
the  number  of  credit  units. 

In  the  community  above  supposed,  when  each  producer 
issued  his  own  notes  as  money,  and  the  twenty-five  per  cent, 
surplus  of  a  certain  kind  of  production  took  place,  a  remedy 
more  or  less  perfect  would  have  been  afforded  by  requiring 
redemptions  in  gold  or  silver,  as  with  hanhs  of  issue.  In 
that  case,  as  with  banks  of  issue,  notes  once  issued  could 
not,  before  their  return  to  the  issuer,  be  circulated  a  second 
time  ;  if  used  in  production,  as  they  undoubtedly  for  the  most 
part  would  be,  they  could  be  used  but  once ;  and  meanwhile, 
if  the  producer  could  not  sell  because  of  an  overstock  or 
excess,  the  issuer  would  be  called  upon  to  redeem,  and,  on 
the  whole,  production  would  be  kept  within  proper  vol- 
ume by  keeping  circulation  within  proper  volume.  With 
deposit  and  discount  banks,  however,  although  they  keep 
their  reserve  in  gold,  this  is  impossible,  because  there  is 
no  limit  to  possible  circulation  by  their  agency  short  of  a 
commercial  crisis  when  the  volume  of  bank  credits  deter- 
mines the  amount  of  metallic  money  circulated,  instead  of 
the  latter  determining  the  former.  A  rising  scale  of  loans 
shows  a  rising  scale  of  production  rendered  possible  by  a 
rising  scale  of  prices.  All  the  labor  is  paid  for  by  gold,  all 
the  raw  material  by  gold  also,  which  is  in  the  consolidated 


BANKING  IN  ENGLAND. 


127 


reserve  behind  bank  credits.  But  this  gold  is  the  precise 
equivalent  of  bank  credit,  —  nothing  more  or  less,  —  because 
the  result  would  be  the  same  if  the  reserve  were  out  of  the 
way  ;  and  two  things  which  are  equal  to  the  same  thing  are 
equal  to  each  other.  Hence  it  may  be  called  (this  circula- 
tion of  gold),  what  it  in  fact  is,  the  equivalent  of  units  of 
bank  credit,  and  nothing  else.  But  this  same  credit  controls 
the  metallic  circulation  throughout  the  kingdom  ;  therefore 
the  circulation  of  gold  throughout  the  kingdom  is  the  pre- 
cise equivalent  of  a  like  amount  of  bank  credit,  or,  what 
is  the  same  thing,  paper  units.  But  a  rising  scale  of  bank 
loans  means,  as  already  demonstrated,  a  rising  scale  of  prices 
proportioned  to  the  rising  scale  of  loans,  and  both  in  the 
order  named  lead  to  an  equivalent  amount  of  unsold  pro- 
ductions. What  renders  this  overstock  possible  ?  Nothing 
but  rising  prices,  which  import  simply  that  the  expansion  of 
circulation,  unbalanced  by  an  equivalent  contraction,  has  so 
advanced  in  that  part,  as  well  as  all  other  parts  of  the  great 
field  of  production,  —  the  prices  of  things  sold  for  actual  con- 
sumption to  consumers,  to  merchants,  and  to  speculative 
buyers,  whatever  the  production  may  be,  —  that  there  is  an 
apparent  profit  in  all  the  stock,  and  an  actual  profit  so  far  as 
sales  for  consumption  are  made  or  loans  are  actually  repaid. 
The  expansion  of  circulation  through  loans,  although  the 
subjective  result  of  the  paramount  cause,  which  is  actual 
ability  for  a  time  on  the  part  of  the  producers  in  this  line 
to  go  in  advance  of  the  producers  of  absolute  necessaries  at 
the  base  line,  becomes  of  itself  a  working  cause,  operating 
to  conceal  real  depreciation,  in  the  guise  of  apparent  appre- 
ciation, through  the  rising  scale  of  prices  caused  by  the 
rising  scale  of  bank  loans.  But  is  there  no  remedy  ?  Is 
the  popular  opinion  that  metallic  money  is  the  safest  and 
steadiest  of  all  money  a  delusion,  because  the  opinion  that 
metallic  money  is  a  commodity  is  a  delusion  ?  By  no  means. 
The  popular  opinion  is  substantially  sound  ;  but  upon  the 
baseless  theory,  in  short  the  fallacy,  that  any  money  can  be 
a  commodity,  it  is  utterly  impossible  to  demonstrate  why, 
and  wherein,  and  under  what  conditions,  the  popular  opinion 


128 


POLITICAL  ECONOMY. 


is  sound.  The  grand  object  is  stability  of  prices.  It  has 
been  demonstrated  ah*eady,  that  if  production  and  consump- 
tion balance,  the  expansion  and  contraction  of  circulation 
balance  ;  and  for  that  reason,  and  for  that  only,  prices  con- 
tinue steady.  It  has  been  further  demonstrated  that  the 
use  of  metallic  money,  where  the  larger  (wholesale)  transac- 
tions of  commerce  are  accomplished  by  the  circulation  of 
metal  in  a  consolidated  fund  with  uncontrolled  power  of  dis- 
count in  the  managers,  gives  no  guaranty  whatever  of  stead- 
iness, because  credits  are  thus  made  to  control  the  metal, 
instead  of  the  metal  controlling  the  credits.  The  remedy 
lies,  therefore,  in  solving  this  problem  :  How  to  make  metal 
control  bank  credits.  It  is  manifest  that  there  is  but  one 
way  of  solving  the  problem,  and  that  is  by  keeping  at  all 
times  a  definite  minimum  ratio  of  reserve  to  liabilities  in  all 
banks,  whether  each  bank  keep  its  own  share  in  the  consol- 
idated reserve  belonging  to  depositors  in  its  own  vaults,  or 
whether  all  reserves  be  kept  in  the  Bank  of  England.  It  is 
easy  to  lay  down  the  rule,  but  to  carry  it  into  effect — hie 
labor,  hoc  opus  est.  Banks  of  issue,  having  no  deposit,  if 
well  and  honestly  worked,  necessarily  keep  a  definite  min- 
imum ratio  of  reserve  by  their  own  working,  because  all  re- 
demptions must  be  made  out  of  the  redemption  reserve,  and 
that  reserve  must  be  supplied  from  metallic  circulation  out- 
side. As  consumption  of  the  goods  produced  by  means  of 
the  bank-notes,  loaned  and  paid  out  for  labor  and  materials, 
progresses,  the  notes,  or  metal  in  their  absence,  will  be  re- 
turned to  the  banks  in  payment  of  loans,  and  expansion  will 
be  balanced  by  contraction.  The  very  moment  production 
is  unduly  stimulated  by  loans,  that  moment  the  banks  are 
called  upon  to  pay  out  from  the  reserve  more  metal  than 
their  receipts,  in  the  shape  of  metal  and  their  notes,  and 
they  are  thus  compelled  in  the  end  to  contract  loans.  They 
are  compelled,  because  they  have  no  consolidated  reserve  con- 
stantly replenished  by  redeposit,  out  of  which  to  redeem  at 
all  times  and  under  all  circumstances.  In  England  such  a 
redemption  of  bank-notes  would  not  be  required  were  de- 
posit and  discount  banking  abolished,  because  the  circulation 


BANKING  IN  ENGLAND. 


129 


is  nearly  all  metallic,  actually  or  representatively  ;  but  the 
principle  involved  is  the  same,  because  bank-credit  and  bank- 
note units  are,  as  I  have  already  demonstrated,  one  and  the 
same,  or  rather,  it  is  a  necessary  corollary  from  the  demon- 
stration made. 

Why  does  metallic  money,  left  to  itself,  give  the  safest 
and  steadiest  circulation  ?  Because  the  ratio  of  annual  pro- 
duction to  the  total  mass,  however  great  or  however  small, 
has  never,  on  the  whole,  seriousl}^  advanced  beyond  the  prog- 
ress of  commerce,  that  is  to  say,  of  distribution  and  consump- 
tion. Adam  Smith  was  substantially  right  in  saying  that 
bank-notes  (deposit  had  not  developed  in  his  time  beyond  a 
germ),  always  convertible,  could  not  exceed  in  volume  the 
gold  and  silver  .whose  place  they  took ;  but  he  was  wrong  in 
not  affirming  that  the  volume  of  money  will  be  actually  in- 
creased throughout  the  whole  commercial  world  by  the  exact 
volume  of  the  notes  above  reserve.  The  effect  of  a  paper  or 
credit  circulation  regulated  exactly  in  such  a  manner  by 
metal  that  production  cannot  be  far  in  excess  of  consump- 
tion, because  by  reason  of  the  steadiness  of  prices  overpro- 
duction "would  soon  demonstrate  to  the  eyes  of  the  producer 
positive  loss  instead  of  apparent  profit,  is  substantially  the 
same  as  one  of  metal. 

The  metal,  in  such  a  case,  must  actually  circulate ;  other- 
wise it  cannot  regulate  the  circulation  of  tlie  units  of  paper  or 
credit.  A  circulation  like  that  of  France  is  steady  in  the 
highest  degree  ;  a  circulation  consisting  largely  of  units  of 
bank  credit  can  be  made  steady  to  a  high  degree,  provided 
the  plan  of  a  fixed  minimum  metallic  reserve  be  admitted, 
and  provided  further  it  is  practicable  to  enforce  it. 

All  this  appears  clear  enough  from  the  premises,  but  ut- 
terly incomprehensible  upon  the  false  theory  that  true  money 
is  a  commodity.  Everything  is  money  that  people  can  and 
do  use  as  money. 

If  money  were  a  commodity,  there  is  no  conceivable  way 
of  using  it  except  by  exchanging  it  as  other  commodities  are 
exchanged  for  each  other,  and  in  that  case  we  should  be  in 
the  condition  of  savages ;  what  is  called  double  barter,  if  such 
9 


130 


POLITICAL  ECONOMr. 


a  process  be  conceivable,  would  be  putting  us  in  a  condition 
worse  than  that  of  savages. 

But  the  false  theory,  so  difficult  to  overcome  and  perhaps 
in  some  minds  impossible  to  overcome,  that  gold  coin,  when 
used  as  money,  is  also  used  as  a  commodity,  as  already 
shown,  leads  to  the  theory  equally  false,  that  the  units  of 
bank  credit,  if  circulated  by  the  instrumentality  of  checks, 
are  still  like  units  of  ordinary  credit,  and  circulate  as  bills 
of  exchange  or  promissory  notes  circulate.  This  proposi- 
tion, when  carefully  examined,  is  just  as  false  and  incom- 
prehensible as  the  proposition  that  money  when  circulated 
in  the  shape  of  gold  is  a  commodity.  If  the  circulation  of 
gold  can  be  carried  so  far  that  the  units  circulated  by  it 
are  only  equal  in  power  and  effect  to  units  of  bank  credit 
in  keeping  prices  steady,  because,  as  already  demonstrated, 
all  money-units  are  in  the  denominator  of  the  ratio  of  price 
mere  units  and  nothing  more,  —  the  heavier  the  units  of 
metal,  exactly  so  much  less  the  whole  number,  —  it  follows 
incontestably  that  credit,  eo  nomine^  and  by  that  designa- 
tion, does  not  circulate.  It  might  be  said  with  precisely  as 
much  meaning,  and  with  vastly  more  truth,  that  confidence, 
instead  of  credit,  circulates,  because  although  they  are  equiv- 
alent words,  the  word  confidence  would  at  once  demonstrate 
to  the  practical  as  well  as  the  scientific  mind  the  utter  im- 
possibility, because  inconceivability,  of  a  circulation  of  credit. 
But  there  is  a  germ  of  truth  also,  even  in  the  proposition  that 
credit  circulates  ;  because  credit  ov  confidence  is  the  founda- 
tion for  the  use  of  units  of  credit,  whether  furnished  by 
individuals  or  banks.  Bills  of  exchange  and  promissory  notes 
might  undoubtedly  be  used  as  money  as  already  shown,  pro- 
vided the  makers  and  indorsers  were  known  and  had  ample 
credit,  and  provided,  further,  the  bills  and  notes  could  be  and 
were  divided  in  suitable  sums ;  and  last  and  more  than  all, 
provided  the  proper  set-offs  could  be  made  by  payments  fol- 
lowing clearings.  Clearings  transfer  from  the  last  or  retail 
distributors  to  wholesale  distributors  units  of  bank  credits 
belonging  to  the  former,  and  created  by  the  deposit  of  money 
made  by  the  former,  consisting  undoubtedly  in  part  of  like 


BANKING  IN  ENGLAND. 


131 


credits  transferred  to  them  by  check  from  consumers,  but 
very  largely  of  gold  and  silver  and  bank-notes.  The  set-off 
of  bank  credits  thus  transferred  to  the  wholesale  distributor 
against  the  debt  he  owes  one  or  more  banks,  and  evid»enced 
by  his  note  or  bill,  takes  place  by  means  of  a  check  going 
into  a  clearing  and  drawn  by  himself,  the  proper  function 
of  which  check  is  to  cause  the  set-off  to  take  place.  Bank 
credit  is  thus  extinguished  to  the  amount  of  the  check, 
which  is  equal  to  the  amount  of  the  bill  or  note.  The  ex- 
pansion of  circulation  arising  originally  from  the  loan,  which 
was  the  foundation  of  the  bill  or  note,  and  which  was  the 
foundation  of  an  equal  expansion  of  production,  is  now  bal- 
anced exactly  by  an  equal  contraction  of  circulation,  or,  as 
it  may  be  put,  of  an  exactly  equivalent  power  to  put  money 
in  circulation  by  means  of  bank  credit.  Precisely  to  the 
same  extent  production  is  balanced  by  consumption.  It  is 
consumption,  in  short,  which  enables  circulation,  or  the  power 
to  put  money  in  circulation,  to  be  contracted.  The  next 
item  in  the  clearing  is  a  check  given  by  a  wholesale  distrib- 
utor to  a  manufacturer  or  his  agent  or  factor,  transferring 
to  him  say  one  thousand  pounds  in  payment  for  a  bill  of  do- 
mestic goods  of  like  amount,  which  are  rising  in  price  nom- 
inally in  consequence  of  increasing  overstock,  and  are  them- 
selves a  part  of  the  overstock.  The  manufacturer  or  his 
agent  or  factor,  as  the  case  may  be,  already  owes  one  of  the 
banks  a  much  larger  amount,  and  in  fact  he  owes  for  all  the 
overstock  in  his  hands ;  and  his  debt  is  represented  in  part 
by  bank  credits  now  held  by  other  parties,  which  have  by 
their  creation  relatively  decreased  the  total  of  banking  re- 
serve, and  in  part  by  gold,  silver,  and  notes  taken  out  of 
reserve  on  his  loans  to  pay  for  labor,  and  which  have  thus 
absolutely  decreased  reserve.  The  absolute  and  the  relative 
decrease  is  all  one  and  the  same  thing,  tending  to  the  same 
result,  and  distinguished  now  only  for  the  purpose  of  show- 
ing with  rigorous  accuracy  how  each  arose.  The  relative 
decrease  of  bank  reserve  came  apparently  by  creating  and 
loaning  bank  credit  to  pay  for  raw  material,  but  the  absolute 
decrease  came  by  the  withdrawal  of  coin  and  notes  to  pay  for 


132 


POLITICAL  ECONOMY. 


labor.  The  wholesale  distributor,  before  giving  his  check, 
borrows  of  a  bank  one  thousand  pounds  to  pay  the  manufact- 
urer, which  is  placed,  less  discount,  to  his  credit ;  and  he,  by- 
check,  transfers  it  to  the  manufacturer  or  his  agent,  who  by 
his  check  cancels  a  like  amount  of  bank  credit.  Bank  credit 
is  thus,  by  means  of  the  loan  created  to  the  extent  of  one 
thousand  pounds  and  by  check,  immediately  transferred  and 
then  canceled  to  a  like  amount.  But  the  transaction  amounts 
to  nothing  in  respect  to  deposits  in  this  case  because  the  goods 
are  not  sold  to  consumers,  nor  for  cash  not  borrowed.  A 
very  important  result  follows.  By  means  of  apparently  rising 
prices  the  merchant,  without  any  fault  on  his  part,  is  enticed 
into  borrowing ;  the  bank,  without  any  fault  on  the  part  of 
its  managers,  into  loaning ;  and  the  producer  into  more  manu- 
facturing. Other  items  in  the  clearing  may  be  checks  grow- 
ing out  of  speculations  in  stocks,  which  are  entirely  distinct 
from  the  other  transactions,  and  have  a  history  and  a  begin- 
ning and  ending  by  themselves.  Nevertheless,  a  properly 
regulated  reserve  would  control  these,  as  well  as  all  other 
commercial  or  speculative  transactions. 

Doubtless  eras  of  speculative  transactions  may  and  do 
arise,  without  the  aid  of  banks,  by  means  of  speculative 
demand  arising  from  extraordinary  causes,  both  in  war  and 
peace ;  but  the  ever-present  and  ever-acting  causes  in  highly 
commercial  countries  are  those  named,  and  they  are  increas- 
ing, and  are  likely  to  still  further  increase,  by  the  extension 
of  banks.  No  practical  man,  nevertheless,  will  set  his  face 
against  deposit  and  discount  banks,  or  urge  their  abolition. 
The  unequaled  advantages  afforded  by  them  will  not  allow 
Englishmen  or  Americans  to  agitate  the  public  mind  for 
their  abandonment.  Regulation,  but  not  destruction,  is  the 
word.  To  abolish  banking  in  England  and  the  United  States 
would  disturb  the  ratio  of  gold  distribution,  and  perhaps 
make  it  necessary  to  remonetize  silver.  It  is  a  monstrous 
fallacy  to  assert  that  bank  credit  is  like  mercantile  credit. 
The  area  of  commerce  included  within  the  limits  affected  by 
London  clearings  is  too  vast,  the  transactions  too  compli- 
cated, and  the  conveniences  for  setting  off  or  balancing  of 


BANKING  IN  ENGLAND. 


133 


the  expansion  of  circulation  by  its  contraction  when  con- 
sumption takes  place  too  uncertain,  for  anything  resembling 
mercantile  credit  to  answer  the  purpose,  as  affirmed  by  Eng- 
lish writers.  Mercantile  credit  will  not  circulate  ;  bank- 
credit  in  the  shape  of  units  can.  Mercantile  credit  in  units 
might  circulate,  undoubtedly,  within  a  narrow  field,  as  I  have 
already  shown,  but  it  does  not  in  England,  nor  does  it  in  the 
United  States.  Foreign  bills  of  exchange  are  a  temporary 
contrivance  ;  they  are  all  discounted,  and  the  credits  arising 
extinguished  through  consumption,  by  means  of  banks.  All 
credit  helps  to  raise  prices,  undoubtedly,  but  the  primary 
and  paramount  causes  are  those  before  mentioned.  The  fact 
that  circulation  of  gold  by  means  of  units  of  bank  credits 
having  behind  them  no  fixed  minimum  reserve  of  metal,  and 
a  circulation  of  credit  units  without  gold,  are  substantially 
one  and  the  same  thing,  is  so  important  that  it  has  led  me 
to  some  repetition.  A  minimum  reserve  is  one  that  never 
goes  below  a  fixed  ratio  at  starting. 

THE  ENGLISH  BANKING  CRISIS  OF  1866,  AND  THE  ENG- 
LISH COMMERCIAL,  INDUSTRIAL,  AND  BANKING  CRISIS  OF 
1874-75. 

The  truth  of  the  propositions  demonstrated  is  practically 
shown  by  the  English  crisis  of  1866,  and  the  crisis  of  1874-75, 
still  in  operation  in  1877. 

Every  crisis  has  a  commercial,  industrial,  and  banking 
side,  but  the  crisis  of  1866  more  particularly  affected  the 
banks.  The  grand  cause  in  operation  was  undoubtedly  the 
progress  of  production  to  satisfy  minor,  secondary,  or  rela- 
tive wants  in  excess  of  absolute  wants,  and  consequently  of 
population.  Money  had  been  loaned,  as  usual,  for  the  pur- 
poses of  production,  and  speculators,  as  well  as  merchants, 
took  the  overstock  to  a  large  extent  from  first  and  some- 
times second  hands  to  invest  abroad.  Cotton  and  cotton 
fabrics  had  fallen  in  price,  and  a  large  part  of  the  invest- 
ments had  cost  too  much,  and  some  were  comparatively  un- 
productive. The  fall  of  cotton  in  price  and  the  ill  success  of 
the  attempts  to  increase  cotton  supply  in  the  East  consti- 


134 


POLITICAL  ECONOMY. 


tuted  an  important  element  in  the  crisis.  It  happened,  as 
in  every  crisis,  that  the  investments  were  largely  unpro- 
ductive, and  the  loss  came  to  a  great  extent  from  fall  in 
prices,  because  the  investments  had  been  made  under  the 
rising  scale,  when  everybody  was  investing,  and  the  invest- 
ers  were  called  upon  to  realize  under  the  falling  scale  of 
prices,  when  everybody  wanted  to  sell.  The  banking  phase 
of  the  crisis  of  1866  was  thus  more  prominent  in  its  direct 
apparent  effects  in  England  than  either  the  commercial  or 
industrial  phase.  Had  the  adventurers  in  cotton  planting 
been  able  to  furnish  cotton  at  the  rates  of  the  time  in  abun- 
dance, the  crisis  would  have  been  less  severe  ;  but,  on  the 
whole,  the  same  causes  were  at  work  in  this  crisis  as  in  all 
others.  Rising  prices  cannot  unduly  stimulate  the  produc- 
tion of  the  absolute  necessaries  of  life,  simply  because  that 
kind  of  production  cannot  be  in  excess,  but  other  production 
can  be  relatively  in  excess.  It  never  can  be  in  excess,  how- 
ever, to  a  sufficient  extent  to  bring  on  a  crisis  like  that  of 
1866  without  the  aid  of  a  rising  scale  of  prices.  Suppose 
prices  had  been  steady,  as  under  the  metallic  circulation  of 
France  ;  the  loss  in  overstock  by  falling  prices  would  have 
been  apparent  as  the  overstock  increased,  and  it  never  could 
have  been  carried  so  far  under  steady  prices  as  to  produce 
serious  embarrassment,  because  the  circulation  of  money 
could  not  be  increased  in  payment  for  labor  and  raw  mate- 
rial so  as  to  make  any  serious  amount  of  overstock.  The 
effect  of  a  steady  circulation  is  to  force  sales  for  cash  long 
before  a  crisis  can  take  place,  and  those  who  buy,  even  on 
speculation,  buying  as  they  do  at  prices  which  can  be  real- 
ized again,  can  suffer  little  loss.  The  crisis  of  1874-75  in 
England  was  more  particularly  commercial  and  industrial 
than  that  of  1866.  Nevertheless,  it  had  a  banking  as  well 
as  commercial  and  industrial  side,  although  the  overstock 
extended  more  or  less  to  all  departments  of  industry  outside 
of  agriculture  in  England. 


BANKING  IN  ENGLAND. 


135 


CAUSES   OF   THE  FAILURE   OF   THE   BANK  ACT   OF  1844, 
BRIEFLY  STATED. 

A  metallic  circulation,  unaided  by  banks,  will  maintain 
steady  prices,  notwithstanding  the  tendency  in  advanced 
nations  like  England  and  the  United  States,  increased  by 
improvements  in  machinery  and  other  additions  to  produc- 
tive power,  to  produce  the  relative  in  excess  of  the  absolute 
necessaries  of  life  ;  and  steady  prices  will  prevent  the  ten- 
dency to  unbalanced  production  from  going  so  far  as  to  pro- 
duce a  serious  commercial  crisis,  even  by  the  aid  of  personal 
credit,  because,  while  general  prices  remain  steady,  any  im- 
portant increase  of  overstock  would  reduce  the  price  at  which 
articles  of  the  kind  in  overstock  could  be  sold  relatively  be- 
low the  range  of  general  prices,  and  demonstrate  loss  then 
and  there,  instead  of  postponing  the  demonstration  to  the 
time  of  a  commercial  crisis  by  means  of  a  rising  instead  of 
a  falling  scale  of  prices,  which  rising  scale  always  accom- 
panies overproduction.  Any  metal  sufficient  in  quantity  to 
distribute  its  units  of  conventional  value  over  the  whole  com- 
mercial world  in  the  tracks  of  commerce,  will  carry  definite 
ratios  of  quantity  by  weight  into  coin  and  into  manufacture, 
and  while  this  natural  distribution  is  not  materially  dis- 
turbed, no  material  excess  of  circulation,  and  therefore  of 
production,  can  occur. 

In  the  second  place,  I  have  demonstrated  that  when  pro- 
duction and  consumption  balance,  the  expansion  and  contrac- 
tion of  circulation  balance,  and  prices  are  steady ;  therefore, 
under  such  conditions,  a  paper  or  credit  circulation,  consist- 
ing of  units  circulated  by  means  of  banks,  would  maintain 
steady  prices.  But  inasmuch  as  that  kind  of  production 
which  grows  out  of  advancing  civilization,  and  does  not  em- 
brace the  absolute  necessaries  of  life,  tends  to  advance  in 
excess  of  the  latter,  paper  or  credit  units  paid  out  for  labor 
and  raw  material  having  no  such  natural  limitation  as  those 
of  metal,  and  therefore  furnishing  no  natural  limitation  to 
possible  circulation,  cause  a  rising  instead  of  falling  scale  of 


136 


POLITICAL  ECONOMY. 


prices.  The  tendency  to  overstock  in  the  direction  named  is 
not  only  made  possible,  but  is  actually  carried  into  effect  by 
the  use  of  such  units,  because  the  depreciation  naturally  fol- 
lowing large  overstock  is  converted  into  apparent  apprecia- 
tion by  a  rising  scale  of  prices  while  the  overstock  is  being 
produced. 

In  the  third  place,  paper  and  credit  units  whose  circula- 
tion is  controlled  by  a  definite  ratio  of  metallic  units  approx- 
imate to  the  steadiness  of  a  metallic  circulation,  because  the 
circulation  of  the  former  is  thus  prevented  from  being  car- 
ried to  such  excess  as  to  cause  overproduction  and  a  rising 
scale  of  prices.  The  metallic  units  regulating  the  credit 
units  rather  than  the  latter  the  former,  expansion  and  con- 
traction balance,  although  not  as  perfectly  as  under  an  ex- 
clusively metallic  circulation. 

An  artificial  derangement  of  the  distribution  of  the  metal 
by  war  and  conquest,  as  in  the  times  of  the  Roman  empire, 
and  as  of  late  in  Euro{)e,  or  by  other  means,  may  temporarily 
derange  the  stability  of  the  purchasing  power  of  coin. 

In  the  fourth  place,  a  currency  consisting  entirely,  or 
almost  entirely,  of  gold,  circulated  actually  or  representa- 
tively, as  in  England  under  the  Bank  Act  of  1844,  affords 
no  steadiness  where  units  of  credit  control  those  of  metal. 
The  natural  steadiness  of  a  metallic  circulation  is  lost  by  the 
artificial  contrivance  of  banking,  unless  it  is  restored  by  an 
equally  artificial  arrangement  of  reserve,  there  being  no  limit 
as  yet  found  to  possible  circulation  out  of  a  consolidated  me- 
tallic reserve  in  England,  for  the  same  reason  that  none  has 
yet  been  found  to  the  circulation  out  of  a  paper  reserve, 
short  of  a  commercial  crisis.  Money  is  paid  out  in  the  shape 
of  units  of  gold  and  silver  ;  units  of  gold  on  deposit  in  the 
issue  department  of  the  Bank  of  England  represented  and 
covered  by  an  exactly  equal  issue  of  vouchers  to  the  deposit 
of  the  gold  in  the  shape  of  bank-notes  ;  units  of  bank-notes 
issued  for  a  like  amount  of  government  debt  belonging  to 
the  bank  ;  and  units  of  bank  credit  convertible  on  demand 
into  the  gold  of  the  consolidated  reserve  in  the  shape  of  the 


BANKING  IN  ENGLAND. 


137 


vouchers  before  mentioned,  and  so  at  any  time  into  gold  it- 
self, for  the  absolute  necessaries  of  life  in  tbe  shape  of  wheat, 
or  relative  necessaries  in  the  shape  of  iron  for  instance,  after 
it  has  been  produced  and  is  ready  for  market.  These  pay- 
ment are  effected,  undoubtedly,  to  a  large  extent  by  the  aid 
of  bank  loans,  and  thus  cause  an  expansion  of  circulation  ; 
but  the  consumption  of  nearly  the  whole  produce  of  wheat 
within  the  year  produces  a  corresponding  contraction ;  the 
non-consumption  of  the  iron  maintains  expansion.  Loans 
everywhere  and  under  all  circumstances  produce  an  expan- 
sion. Gold,  in  its  distribution  throughout  the  commercial 
world  (so  far  as  not  artificially  prevented),  by  following 
commerce,  also  follows  capital,  which  is  the  first  element  of 
productive  power.  All  loans  are  to  some  extent  a  disturb- 
ance of  this  distribution,  and  therefore,  to  maintain  the  ex- 
changes of  commodities  in  harmony,  loans  must,  within  com- 
paratively short  periods,  be  repaid  by  means  of  actual  sales 
to  consumers,  and  not  by  making  a  loan  elsewhere.  All  this 
happens  with  a  metallic  currency  without  banks  of  deposit 
and  discount,  but  not  with  them.  What  an  English  bank 
deals  in,  therefore,  if  a  brief  definition  be  demanded,  is  gold 
and  silver  coin,  gold  vouchers,  and  bank-notes,  placed  for  the 
most  part  in  a  consolidated  fund  belonging  in  definite  por- 
tions to  all  the  banks ;  which  coin,  vouchers,  and  notes  are 
not  actually  delivered  in  most  cases,  because  were  they  de- 
livered they  would  be  immediately  redeposited  in  the  con- 
solidated fund.  But  whether  actually  delivered  or  not,  they 
are  equivalent  only  to  a  like  amount  of  units  of  bank-notes 
or  bank  credits  ;  first,  because  all  units  in  the  ratio  of  price 
are  alike  ;  and  secondly,  because  in  the  whole  circulation  of 
England,  outside  as  well  as  inside  of  banks,  the  units  of 
bank  credit  determine  the  number  of  metallic  units  placed 
in  each  ratio,  as  well  as  the  general  ratio  of  price. 

In  the  foregoing  demonstrations  in  this  chapter  I  have 
assumed,  according  to  the  appearance  of  the  process  and 
common  opinion,  that  what  circulates  between  banks  and 
between  individuals  and  banks  —  what  is  expanded  and  con- 
tracted, paid  out  and  retired  —  consists  of  units  of  bank  debt 


138 


POLITICAL  ECONOMY. 


or  bank  credit.  I  have  written  "credit'"  for  the  most  part 
instead  of  "  debt."  It  is  immaterial  which  term  is  used. 
The  two  words  express  only  two  different  aspects  of  the 
bank  unit.  It  is  a  unit  of  debt  against  the  bank,  while  it 
is  a  unit  of  credit  to  the  depositor  who  disposes  of  or  puts 
money  in  circulation  by  check.  I  have  used  the  words  in- 
discriminately, however,  and  they  are,  while  regarded  as 
units  of  circulation,  one  and  the  same  thing.  But  again : 
what  really  circulates  is  the  metal  in  the  reserve,  in  its  char- 
acter of  a  series  of  units  of  valuing,  purchasing,  and  paying 
power.  If  this  were  not  so,  no  bank  could  ever  become 
bankrupt  by  being  called  upon  to  pay  more  gold  or  give 
checks  for  more  gold  than  it  has  on  deposit  in  the  Bank  of 
England.  In  point  of  fact,  such  a  call  bankrupts  the  bank. 
The  circulation  of  the  units  furnished  by  the  metal  in  the 
reserve,  which  takes  place,  therefore,  through  checks  and 
crediting  and  debiting,  is  precisely  the  same  thing  in  effect 
as  actual  deliveries  of  coin  out  of  and  into  reserve. 

By  bank  loans  out  of  depositors'  reserve  an  equal  amount 
of  debt,  less  discount,  is  created  in  favor  of  the  borrower  and 
against  the  bank,  and  by  actually  taking  the  proceeds  of  the 
loan  in  gold  out  of  the  reserve  the  fund  belonging  to  depos- 
itors is  to  that  extent  reduced.  The  reserve,  which  is  bank 
means  as  well  as  depositors'  fund,  is  reduced,  in  the  first 
instance,  by  creating  a  new  deposit,  and  a  demand  credit  in 
favor  of  the  borrower  without  any  increase  of  reserve ;  in 
the  latter,  by  actual  reduction.  What  seems  to  circulate  in 
all  cases  where  money  is  not  actually  carried  away  from  the 
reserve  is  the  unit  of  demand  credit  thus  created  ;  what 
really  circulates  is  the  number  of  units  of  pounds  marked 
upon  the  check,  never  exceeding  the  number  of  units  of  sov- 
ereigns in  the  reserve  belonging  to  the  bank  drawn  upon  or 
drawing.  That  this  number  contained  in  the  check  shall 
never  exceed  the  number  in  the  reserve  is  the  only  limita- 
tion imposed  under  the  present  system  of  English  as  well  as 
American  banking.  With  a  fixed  minimum  ratio  of  reserve 
to  liabilities  which  I  propose,  the  limitation  would  be  carried 
farther  against  the  bank  by  making  checks  not  only  payable 


BANKING  IN  ENGLAND. 


139 


in  coin  as  they  now  are,  but  by  causing,  at  least  within  very 
short  averages,  a  definite  amount  to  be  kept  there.  In  the 
chapter  on  American  Banking  I  have  called  banking  not 
merely  what  it  is  in  appearance,  but  in  fact,  —  loaning  money 
out  of  a  consolidated  reserve.  Some  repetitions  have  occurred 
in  reference  to  coined  metal  and  bank  credit,  but  they  were 
necessary,  as  they  will  be  hereafter,  to  explain  the  entirely 
new  positions  as  to  the  nature  of  coin  and  the  fixed  ratio  of 
reserve  to  bank  credit  and  bank  debt  which  I  have  taken. 
At  this  period  in  the  commercial  history  of  Great  Britain  and 
the  United  States  the  most  important  thing  to  be  studied, 
and,  if  possible,  understood,  is  the  vastly  complex  subject  of 
banking.  It  is  impossible  to  understand  the  subject  of  pro- 
duction and  exchange  in  these  times  without  understanding 
that  of  banking.  The  influence  of  banking,  in  sustaining  a 
system  of  loans  to  producers  over  and  above  all  loans  pos- 
sible without  banking,  is  the  main  point  to  be  studied  and 
investigated.  All  money  paid  out  counts  units  only  in  the 
denominator  of  the  ratio  of  price ;  and  all  units  in  that  de- 
nominator, whether  counted  out  by  units  of  metal,  paper,  or 
ideal  units  of  bank  debt,  are  in  counting  equally  ideal,  and 
their  relative  value  depends  upon  their  limitation  and  their 
circulation  in  such  a  manner  that  they  shall  be  used  to  ex- 
change commodities  or  buy  labor  only  as  fast  as  commodities 
produced  can  be  exchanged.  This  is  what  all  kinds  of  money 
not  artificially  disturbed  accomplish,  because  money  accom- 
plishes and  follows  the  natural  distribution  of  commodities, 
and  cannot  be  used  to  buy  labor  faster  than  commodities  can 
be  consumed.  Bank  loans  sustain  a  volume  of  production  ex- 
actly equal  to  their  own  over  and  above  all  production  which 
could  otherwise  take  place.  This  is  the  true  reason  why 
Bank  of  England  notes  have  varied  as  gold  would  under  like 
conditions,  but  have  failed  to  vary  as  gold  varies  in  France. 
In  France  gold  varies  not  with  production,  as  in  England, 
but  with  production  limited  at  short  periods  by  consumption. 
The  chief  difference  between  English  and  American  banking 
lies  in  the  fact  that  in  England  what  is  substantially  a  metal- 
lic circulation  is  expanded  by  bank  loans  far  in  advance  of 


140 


POLITICAL  ECONOMY. 


actual  consumption,  by  means  of  unduly  expanded  produc- 
tion ;  in  the  United  States  the  expansion  of .  circulation  is 
aggravated  by  bank-notes  issued  upon  an  insufficient  and 
fluctuating  reserve. 

It  may  be  said,  therefore,  by  way  of  summary,  that  Eng- 
lish banks  do  not,  as  generally  supposed,  deal  in  anything 
like  mercantile  credit ;  for  that  kind  of  credit  does  not  pay 
debts,  but  makes  debts,  while  the  kind  of  credit  banks  deal 
in  (assuming  that  they  deal  in  credit  at  all)  pays  debts, 
leaving  the  borrower  indebted  to  the  lender  as  all  loans  do, 
although  this  debt  is  only  an  incidental,  not  the  .  princi- 
pal result.  Bank  loans  also  leave  another  result,  which  is 
merely  incidental  —  an  equal  increase  of  bank  debt  due  de- 
positors. How  can  this  debt  increase  if  banks  deal  only  in 
mercantile  credit  or  mercantile  debt  ?  Such  increase  would 
be  absolutely  impossible.  What  banks  in  England  really 
deal  in,  is  the  additional  circulation  which  they  give  money 
in  deposit,  by  means  of  loans.  The  proceeds  of  the  loan, 
whatever  they  may  be  called,  buy  commodities  and  pay 
debts,  like  all  other  money,  whether  metal  or  notes.  The 
total  of  mercantile  deposits  in  England  buys  and  pays  like 
an  equal  total  of  metal  or  bank-notes ;  were  every  depositor's 
money  kept  by  itself,  and  a  pound  in  bank-notes  or  metal 
placed  by  itself  for  every  pound  due  him,  he  would  buy  and 
pay  no  more  than  he  does  now.  In  view  of  the  demonstra- 
tion by  induction,  by  analysis  (and  in  this  chapter  by  the 
fact  that  the  theory  alone  explains  banking  phenomena), 
that  all  money  is  a  series  of  units  of  valuing,  purchasing,  and 
paying  power,  it  is  immaterial  whether  we  admit  the  fact, 
that  in  all  cases  the  reserve  pays  all  bank  debts,  because, 
except  in  case  of  panic,  the  reserve  is  always  sufficient  for 
that  purpose,  and  clearing  only  saves  labor,  or  whether  we 
still  choose  to  insist  that  banks  deal  in  their  own  debt.  It  is 
a  dispute  about  words  and  terms  only.  Whether  we  insist 
upon  the  debt  theory  or  whether  we  admit  the  fact  as  it  is, 
one  thing  is  certain  in  either  case :  bank  loans  vary  in  Eng- 
land without  regard  to  metallic  reserve,  and  therefore  with- 
out any  metallic  limitation.    Bank  of  England  notes  vary 


BANKING  IN  ENGLAND. 


141 


there  undoubtedly  with  gold,  as  the  founders  of  the  bank 
asserted,  but  they  do  not  vary  with  gold  as  the  founders 
probably  supposed  they  would,  because  their  theory  of  me- 
tallic money  was  not  in  accordance  with  the  fact.  They 
supposed  it  to  be  a  commodity,  instead  of  a  unit  of  valua- 
tion, purchase,  and  payment,  limited  by  and  embodied  in 
metal.  To  make  its  limitation,  and  therefore  its  variation, 
such  as  they  probably  intended,  mercantile  deposits  which 
are  equivalent  to  bank-notes,  must  be  limited  by  metallic  re- 
serve ;  otherwise  the  phenomenon  is  presented  of  bank-notes 
limited  by  gold,  circulating  into,  out  of,  and  outside  of  bank 
reserve,  while  the  equivalent  of  a  much  larger  amount  of 
notes  is  circulating  through  deposits,  and  varying  with  loans, 
but  not  with  gold.  The  Bank  of  England  can  do  little  for 
steadiness  of  prices  by  raising  the  rate  of  interest.  Artificial 
rise  in  the  rate  of  interest  may  be  salutary,  not  for  the  pur- 
pose of  preventing  the  efflux  of  gold,  but  checking  invest- 
ments through  loans.  With  a  reserve  kept  at  short  intervals 
in  one  unvarying  ratio  with  loans  in  all  the  banks,  there 
could  be  no  efflux  of  gold  which  ought  to  be  checked.  It 
could  arise  only  from  a  deficient  harvest  or  some  similar 
cause.  The  enormous  discounts  of  the  English  joint-stock 
and  private  banks  ought  to  be  regulated  in  some  manner, 
and  it  is  certain  that  there  is  no  effectual  way  of  doing  it 
but  by  the  reserve.  No  wonder  that  the  vast  transactions 
of  those  banks  have  been  supposed  to  rest  on  credit ;  they 
undoubtedly  do,  but  it  is  not  credit  like  that  of  merchants, 
for  it  has  universal  buying  power.  There  is  always  a  foun- 
dation of  truth  in  such  opinions ;  and  the  defect  here  is  want 
of  analysis  to  show  what  kind  of  credit  is  used.  Money  it- 
self is  founded  on  credit,  and  the  use  of  deposits  made  by 
the  English  banks  is  a  credit  circulation  of  the  money  of  de- 
positors, because  in  excess  of  the  circulation  the  latter  give  it 
themselves.  The  final  result^  however,  is  mercantile  credit 
on  an  enormous  scale,  through  the  instrumentality  of  money. 
The  merchants  and  other  investers  finally  perceive  that  the 
results  of  their  investments  stand  debtor  to  other  results  of 
labor  to  a  large  amount  which  cannot  be  realized.    To  pay 


142 


POLITICAL  ECONOMY. 


the  debt,  overstock  in  the  former  stands  debtor  to  under- 
stock in  the  latter,  and  is  first  pledged  as  security,  capital  of 
investers  next,  then  bank  capital  by  way  of  guaranty,  and 
lastly,  through  that  guaranty,  the  capital  of  depositors.  The 
practical  corollary  from  my  theory  of  money,  if  admitted,  is 
that  gold  in  the  reserve  must  be  considered  as  a  limitation  and 
not  a  basis  of  loans.  Whether  the  currency  be  metallic  as 
in  England  or  paper  as  in  the  United  States,  the  reserve 
under  deposit  and  discount  banking  should  be  exclusively 
metallic,  both  for  deposits  and  notes,  for  reasons  which  will 
appear  in  the  next  chapter. 


CHAPTER  VI. 


BANKING  IN  THE  UNITED  STATES. 

Banking  in  the  United  States,  as  before  remarked,  is  like 
banking  in  England,  except  that  bank-notes  instead  of  gold 
are  in  use.  The  issue  of  bank-notes  has  been  intrusted  to  a 
multiplicity  of  banks.  The  regulation  of  banks  of  issue  by- 
banks  of  issue  never  availed  much,  and  in  the  nature  of 
things  never  could,  because  deposit  and  discount  banking 
renders  it  impossible  to  any  great  extent,  even  were  it  other- 
wise possible.  But  suppose  deposit  and  discount  banking 
out  of  the  way,  and  banks  of  issue  only  doing  business. 
How  is  any  one  bank  to  control  the  rest  ?  The  business  of 
a  bank  of  issue,  as  such,  is  to  issue  its  own  notes  payable  on 
demand  in  coin  at  its  counter,  or  at  a  commercial  centre.  It 
is  said  by  most  writers  that  a  bank  of  issue  cannot  keep  in 
circulation  an  excess  of  its  notes  when  convertible,  because 
the  excess  will  be  immediately  returned  for  coin.  But  what 
is  excess  ?  They  have  not  defined  excess ;  and  until  they 
do,  what  does  the  assertion  amount  to  ?  It  amounts  only  to 
saying  that  excess  cannot  be  maintained,  and  that  excess  is 
excess.  But  what  is  excess  in  a  true  scientific  point  of  view? 
Surely  there  can  be  no  excess  when  prices  are  steady.  But 
when  prices  are  steady,  the  exchanges  of  commodities  are 
going  on  harmoniously,  and  therefore  there  is  no  relative  ex- 
cess or  defect  of  production  in  any  one  quarter :  when  it  is 
otherwise  there  is  a  rising  scale  followed  by  a  descending 
scale  of  prices,  as  heretofore  shown.  Therefore  an  excess  of 
note  issues  takes  place,  and  is  afterwards  retired,  where  the 
notes,  by  being  expended  on  labor  or  raw  material  in  excess 
of  demand  on  the  one  hand  or  altogether  unproductively, 
and  therefore  in  excess  of  production  on  the  other  hand,  have 


144 


POLITICAL  ECONOMY. 


caused  an  excess  of  circulation  evidenced  by  a  rising  scale  of 
prices.  The  excess  is  of  the  same  character  in  both  cases. 
Overproduction  in  any  quarter,  therefore,  and  absolutely  un- 
productive consumption,  in  other  words  consumption  without 
any  production  at  all,  have  under  deposit  loans  a  precisely 
equivalent  effect  in  destroying  steadiness  and  producing  a  ris- 
ing scale  of  prices.  Thus,  if  A.  borrows  ten  thousand  dollars 
from  a  commercial  bank,  which  I  will  suppose  to  be  the  only 
bank  in  the  country,  and  pays  it  out  to  weavers  or  spinners, 
whose  product  is  locked  up  and  cannot  be  sold,  all  the  money 
they  expend  goes  into  circulation  and  is  returned  out  of  cir- 
culation, leaving  behind  it  an  equivalent  bank  credit,  which 
is  not  retired  until  through  actual  exchanges  the  product  is 
sold  to  consumers  to  enable  the  borrower  A.  to  circulate 
that  amount  back  into  the  bank  by  payment  of  his  loan : 
the  payment  of  his  loan  consists  in  canceling  bank  credit  or 
increasing  the  reserve.  In  the  mean  time  the  weavers  and 
spinners  have  deposited  a  part  of  their  earnings,  say  twenty 
per  cent.,  in  a  savings  bank.  What  becomes  of  the  two 
thousand  dollars  thus  deposited  in  the  savings  bank  ?  It  is 
deposited  by  the  savings  bank  in  the  commercial  bank,  or 
one  of  its  branches,  and  within  a  month  perhaps  loaned  with 
eight  thousand  dollars  more,  deposited  by  other  weavers  and 
spinners,  to  the  same  A.  for  a  ye^ir  instead  of  a  month;  and 
thus  he  is  enabled  to  hold  his  overstock  in  part  by  the  aid  of 
the  very  weavers  and  spinners  who  received  his  first  money. 
This  latter  operation  makes  the  savings  bank  unwittingly  a 
potent  auxiliary  in  maintaining  overproduction  by  the  aid 
of  the  machinery  of  deposit  and  discount  banking.  Could 
this  occur  under  banks  of  issue  only?  If  it  could,  there 
would  be  so  far  an  issue  of  bank-notes  in  excess  of  commodi- 
ties exchanged  and  therefore  commerce,  giving  rise  to  an 
equal  volume  of  production,  and  causing  a  rising  scale  of 
prices,  which  would  for  a  time  conceal  the  fact  of  the  exist- 
ence of  overstock.  With  strictly  convertible  notes,  however, 
and  banks  of  issue  only,  this  would  be  impossible.  If  a 
loan  is  made  in  bank-notes  borrowed  by  A.  from  a  sound 
bank  of  issue  (discount  and  deposit  banks  being  supposed 


BANKING  IN  THE  UNITED  STATES. 


145 


non-existent)  and  paid  to  weavers  and  spinners,  they  pay 
out  as  before  say  eighty  per  cent,  for  expenses  of  living,  and 
twenty  per  cent,  of  savings  into  a  savings  bank.  The  money 
they  pay  out  for  expenses  of  living  goes  to  dealers  and  oth- 
ers who  do  not  deposit  it  in  a  bank  of  discount  and  deposit, 
because  no  such  bank  exists ;  and  therefore  it  is  not  because 
it  cannot  be  reloaned  to  producers  (before  A.  calls  for  it)  to 
stimulate  production  by  being  paid  out  for  labor  and  mate- 
rial a  second  time,  thus  causing  it  to  be  used  twice  at  least 
as  it  is  under  the  combined  issue,  deposit,  and  discount  sys- 
tem (while  under  the  single-issue  system  it  could,  for  the 
most  part  at  least,  be  used  but  once),  and  so  causing  further 
production  to  take  place  before  it  could  be  returned  to  the 
bank  which  issued  it,  either  by  way  of  repayment  of  the 
loan  or  for  redemption.  The  dealers,  when  having  no  bank 
of  deposit  to  place  the  notes,  must  call  upon  the  issuing 
banks  to  redeem  in  gold,  or  exchange  payable  in  gold,  at  a 
commercial  centre,  taken  from  the  commercial  world's  gold 
at  large  and  not  out  of  a  consolidated  and  fluctuating  reserve 
of  gold.  The  twenty  per  cent,  savings  of  labor  might  still 
under  banks  of  issue  only,  be  deposited  in  a  savings  bank  in 
the  shape  of  bank-notes,  but  the  notes  could  not  be  reloaned 
so  as  to  cause  any  material  excess  of  production,  because 
the  first  borrower  would  be  compelled  to  make  sales  in  the 
market  of  consumers  to  meet  his  bills  maturing  with  the 
issuing  bank,  it  being  impossible  to  pay  to  any  great  extent 
by  renewals.  The  savings  bank  loans,  therefore,  where  there 
are  no  banks  of  discount  and  deposit,  instead  of  tending  to 
increase  production  in  that  quarter  where  excess  of  product- 
ive power  is  liable  to  be  applied,  will  be  taken  by  the  own- 
ers of  what  is  called  fixed  rather  than  by  the  owners  of  what 
is  called  quick  capital.  Excess  of  production  in  any  one 
quarter  as  compared  with  others,  which  has  the  same  effect 
on  general  prices  by  expanding  circulation  as  unproductive 
consumption,  is  kept  in  check,  because  redemptions  keep 
prices  steady  and  limit  loans.  Loans  are  rarely  intended  by 
borrowers  for  aiding  in  the  production  of  absolute  necessaries 
of  life ;  but  if  they  were  applied  to  the  latter  purpose  and 

10 


146 


POLITICAL  ECONOMY. 


were  to  be  in  as  great  excess,  and  produced  overstock,  as  do 
the  loans  which  cause  overproduction  of  relative  necessaries, 
they  would  have  the  same  effect  as  the  latter  in  expanding 
circulation,  for  the  reason  that  they  would  cause  the  same 
expansion  of  deposits  as  compared  with  the  volume  of  com- 
modities distributed.  If  A.  borrows  ten  thousand  dollars  of 
a  bank  at  Lawrence,  Massachusetts,  and  invests  four  fifths 
of  it  in  wool,  and  one  fifth  of  it  in  labor  to  pay  spjnners  and 
weavers,  and  the  cloth  goes  into  overstock  and  cannot  be 
sold,  the  ten  thousand  dollars  have  nevertheless,  to  a  consid- 
erable extent,  gone  into  circulation  to  pay  for  commodities 
which  are  actually  consumed  :  if  there  be  no  relative  excess 
of  commodities  in  any  quarter,  and  the  ten  thousand  dollars 
be  expended  in  consumption  without  producing  anything,  the 
circulation  is  so  far  in  excess  of  production.  In  the  first 
case  production  was  in  excess  of  consumption ;  in  the  latter, 
consumption  was  in  excess  of  production ;  but  in  both,  the 
volume  of  circulation  was  increased  equally  in  excess  of  the 
volume  of  commodities  actually  exchanged.  The  expansion 
occurred  partly  by  the  increase  of  deposits  and  partly  by  loss 
of  reserve,  but  it  was  all  one  and  the  same  thing. 

OF   BANKS   COMBINING  THE  FUNCTIONS  OF  ISSUE,  DE- 
POSIT, AND  DISCOUNT,  IN  THE  UNITED  STATES. 

In  the  United  States  most  banks  combine  the  functions  of 
issue,  deposit,  and  discount ;  banks  having  no  charter,  and 
not  organized  under  any  general  law  permitting  the  issue  of 
notes,  are  what  are  called  private  banks,  possessing  only  the 
functions  of  deposit  and  discount.  To  conduct  such  a  bank 
may  be  regarded,  subject  to  some  limitations  and  conditions, 
as  a  common  law  right,  both  in  England  and  the  United 
States.  The  founders  of  the  Bank  of  England  supposed,  all 
the  English  bankers  of  the  time  supposed,  and  all  the  Eng- 
lish bankers  of  the  present  day,  so  far  as  they  have  spoken 
or  written,  appear  still  to  suppose,  that  all  banks  having  the 
functions  of  deposit  and  discount  deal,  for  the  most  part  at 
least,  in  what  they  call  debt.  All  the  English  and  all  the 
American  writers  upon  the  subject  of  money  and  exchange, 


BANKING  IN  THE  UNITED  STATES. 


147 


are  of  the  same  opinion.  Mr.  Bonamy  Price,  Professor  of 
Political  Economy  in  the  University  of  Oxford,  has  main- 
tained the  theory  with  great  vigor  and  force,  in  showing 
how  utterly  useless  a  large  banking  reserve  is,  assuming  the 
theory  to  be  true.  His  argument  is  sound  and  unanswera- 
ble, if  it  be  true  that  a  bank  deals  almost  altogether  in 
debt."  ^  Hence  the  only  point  at  which  his  argument  is  as- 
fsailable  lies  in  the  premises.  Does  a  bank  deal  in  debt  alto- 
gether, or  for  the  most  part  at  least  ;  or,  on  the  other  hand, 
does  it  deal  in  money  altogether  ?  Has  it  anything  but  money 
to  give  in  exchange  for  the  bills,  notes,  and  other  securities  it 
buys  or  discounts  ?  I  afl&rm  that  it  has  nothing  but  money  to 
deal  in,  because  it  can  deal  only  in  what  it  originally  re- 
ceived. To  say  that  a  bank  deals  in  debt  or  credit  is  really 
equivalent  to  saying  that  it  deals  in  confidence  ;  but  this  ex- 
pression is  without  meaning,  and  equally  so  is  the  other.  The 
fallacy  involved  in  the  expression  comes  naturally  from  the 
fallacy  contained  in  the  assertion  that  gold  coin,  in  its  charac- 
ter of  money,  is  a  commodity ;  and  a  greater  fallacy  than  this 
can  hardly  be  found,  although  it  approaches  very  nearly  to 
the  truth.  I  say,  very  nearly,  because  the  material  of  which 
gold  coin  is  made  is  a  commodity  ;  the  units  of  valuation, 
and  purchasing  and  paying  power,  brought  into  operation  by 
the  use  of  the  coin,  are  not.  They  are  no  more  so  than  like 
units  brought  into  operation  by  the  use  of  bank-notes,  or 
even  bank  debts,  were  bank  debts  so  used.  I  will  demon- 
strate this  proposition  in  a  few  words,  as  I  have  already  done 
in  other  chapters.  The  use  of  gold  and  silver  to  coin  units 
of  valuation  and  purchasing  and  paying  power  is  conven- 

1  In  one  sense  only  does  a  bank  deal  in  debt.  All  its  deposits  over  and 
above  reserves  are  debt  due  tbe  bank  by  producers  of  some  sort  for  stock  in 
the  shape  of  products,  which  remain  unsold  over  all  products  of  the  kind  which 
could  be  found,  if  the  loans  from  the  bank  had  never  been  made,  allowing:  for 
differences  in  prices,  in  the  two  cases.  For  all  this  accumulation  of  unsold 
stock,  which  has  cost  metal  or  bank-notes  out  of  the  reserve,  the  commodities  in 
stock  stand  debtor  to  the  commodities  consumed  by  the  laborers  who  have  pro- 
duced the  stock,  and  the  producers  of  raw  material.  The  debt  can  only  be  paid 
by  exchanging  the  stock  indirectly  through  money,  for  other  products  offered 
by  consumers. 


148 


POLITICAL  ECONOMY. 


tional,  as  the  partial  demonetization  of  silver  has  practically 
shown.  The  use  being  conventional,  the  value  is  conven- 
tional. Gold  is  not  worth  what  it  buys,  because  it  cost  an 
equivalent  amount  of  labor  to  produce  it,  but  it  cost  that 
amount  of  labor  (if  such  be  the  fact)  because  the  conven- 
tional value,  which  means  purchasing  power,  makes  it  worth 
that  amount  of  labor  to  obtain  it.  Take  away  conventional 
value,  and  a  large  part  of  the  labor  employed  in  mining  gold 
will  be  stopped.  Its  conventional  value  controls  and  absorbs 
all  its  mercantile  value.  Again,  token  coins  as  they  are 
called,  by  the  very  fact  of  their  use,  furnish  a  practical  de- 
monstration to  the  same  effect.  Such  coins  derive  their  con- 
ventional value  from  the  fact  of,  and  the  limitation  implied 
in,  coinage  on  government  account,  with  the  exclusion  of 
coinage  for  individual  account.  If  it  were  possible  to  devise 
a  plan  by  which  governments  could  combine  in  coining  silver 
for  what  is  called  token  circulation,  with  one  fifteenth  of  the 
present  mass  of  silver  coin,  and  hereafter  with  such  portion 
of  the  annual  product  as  would  maintain  conjointly  with 
gold  the  same  ratio  of  value  of  total  annual  coinage,  to  the 
total  value  of  the  mass  already  in  coin,  as  would  be  main- 
tained were  silver  universally  remonetized,  then  a  token 
coinage  of  this  kind,  were  the  danger  from  counterfeiting  re- 
moved, as  it  probably  could  not  be,  would  be  as  stable  in 
value  as  gold  itself.  This,  however,  would  be  impossible, 
not  because  there  is  any  natural  relation  existing  between 
given  weights  of  silver  and  of  wheat,  or  other  commodities, 
but  because  such  a  convention  could  not  be  carried  into  effect, 
by  reason  of  the  impossibility  of  controlling  the  quantity  of 
the  mass  of  silver  in  coin,  the  annual  production  and  the  an- 
nual consumption  by  manufacture.^    These  elements  would 

1  The  term  Token  Coinage  is  not  correct.  Waiving  the  danger  of  an  excess 
of  coin  by  counterfeits  made  of  true  metal,  and  the  possibility  of  governments 
issuing  an  excess,  single  and  double  eagles  of  silver  might  be  coined  of  the  same 
weight  as  those  coins  now  have  of  gold.  They  might  be  declared  of  equal 
value  with  those  coins  and  legal  tender.  They  would  then  stand  precisely 
upon  the  same  footing  of  national  conventional  value  as  the  treasury  notes 
called  Greenbacks,  do  to-day.  The  field  of  convention  would  be  the  United 
States,  and  not  the  commercial  world.   Such  coin  would  be  subject  to  the  same 


BANKING  IN  THE  UNITED  STATES. 


149 


render  abortive  all  such  attempts.  Again,  it  is  a  fallacy  to 
assert  that  bank  clearings,  or  transfers,  or  contractions  of 
bank  debt  effected  in  any  manner,  are  the  real  payments, 
because  if  money  is  not  taken  by  banks,  or  by  customers  out 
of  the  reserve,  in  the  shape  of  coin  or  bank-notes,  it  is  be- 
cause the  labor  is  saved  by  clearing  or  otherwise.  Banks 
have  coffers  amply  stored  to  meet,  and  much  more  than 
meet,  all  ordinary  calls,  as  Mr.  Bonamy  Price  has  well  re- 
marked. If  the  coin  is  not  taken  out  by  a  check-holder,  who 
wishes  to  make  a  deposit  or  pay  a  bank  debt,  it  is  because  it 
is  unnecessary,  and  because  he  would  thus  lose  a  part  of  the 
unrivaled  convenience  given  to  customers  by  our  banking 
system.  The  result  is  the  same  as  if  the  metal  or  notes  were 
taken  from  deposit  and  afterwards  redeposited.  Clearing  is 
precisely  the  same  in  principle,  then,  with  payment  out  of 
bank,  of  coin  or  coin  vouchers  in  England,  or  bank-notes  in 
the  United  States,  to  pay  for  labor  or  commodities  ;  the  only 
difference  is  that  clearing  is  possible  as  to  the  larger  trans- 
actions of  commerce,  because  coin  or  notes,  if  paid  out,  would 
stay  out  of  deposit  less  than  a  day,  while  as  to  the  smaller 
transactions  they  must  stay  out  a  much  longer  time.  There- 
fore, if  the  clearings  are  mere  settlements  of  credits,  so  are 
the  payments  of  gold  in  England  and  bank-notes  in  the 
United  States,  from  the  reserve,  and  their  return  afterwards 
to  the  reserve ;  the  difference  is  only  one  of  time.  But  there 
is  some  truth  in  the  assertion  that  a  bank  deals  only  in  debt ; 
the  fallacy  consists  in  not  stating  the  whole  truth  ;  and  the 
whole  truth,  as  I  have  just  demonstrated,  appears  to  be  that 
gold  coin,  when  used,  only  furnishes  units  of  valuation  and 
purchasing  and  paying  power,  inversely  proportioned  to  the 
number  used  to  buy  a  given  number  of  units  of  commodi- 
ties; that  both  convertible  and  inconvertible  government 
and  bank  notes  furnish  units  of  like  sort ;  and  that  circula- 
tion resulting  from  the  use  of  gold  coin  or  bank-notes,  out  of 

objection  with  these  notes ;  they  could  not  follow  the  tracks  of  commerce 
throughout  the  commercial  world.  The  German  aud  Latin  union  silver 
coin  now  circulates  upon  this  principle;  it  is  not  money  of  the  commercial 
world. 


150 


POLITICAL  ECONOMY. 


a  fluctuating  and  virtually  consolidated  reserve,  which  is  the 
sum  of  all  banking  reserves,  is  of  the  same  kind.  This  cir- 
culation may  be  called  a  credit  circulation,  only  in  the  sense 
that  it  is  substantially  the  same  thing,  •  whether  gold  or 
notes  be  paid  out,  because  gold  or  notes  may  be  wanted,  or 
because  clearing  is  impossible  ;  or,  on  the  other  hand,  saved 
from  being  paid  out,  because  it  is  possible.  An  excessive 
circulation  of  gold,  therefore,  growing  out  of  the  use  of  a 
consolidated  fund  of  gold,  is  the  same  thing  in  effect  as  the 
circulation  of  units  of  bank-notes,  whether  convertible  or  in- 
convertible, or  units  of  bank  debt.  None  of  these  cause  a 
circulation  of  debt,  credit,  or  confidence,  because  that  would 
be  absurd  and  impossible  ;  but  all  furnish  units  of  valuing^ 
purchasing^  and  paying  power.  The  problem  to  be  solved, 
therefore,  is  how  to  keep  these  units  founded  on  credit  or 
debt  in  subordination  (in  point  of  number)  to  the  number 
of  units  of  commodities,  not  produced  only,  but  produced 
and  consumed,  so  as  to  keep  steady  prices. 

No  doubt  units  of  valuation  and  of  purchasing  and  paying 
power  could  be  furnished  by  means  of  banks,  and  indeed  by 
merchants,  or  even  consumers  generally,  in  the  shape  of 
notes,  bills,  or  book  credit.  But  clearings  would  be  impossi- 
ble between  these  persons  except  by  the  aid  of  banks. 

The  mistake,  therefore,  lies  not  in  asserting  that  credit  or 
confidence  is  the  foundation  of  all  dealings  with  banks,  be- 
cause that  cannot  be  denied ;  but  in  asserting  that  gold  and 
silver  coin  are  commodities,  having  value  in  themselves  as 
coin,  distinguished  from  their  conventional  or  what  may  be 
called  their  accredited  value,  and  that  credit  can,  by  any  pos- 
sibility, furnish  a  circulation  in  any  other  than  the  character 
of  units  of  the  kind  named,  redeemable  on  demand  by  the 
issuer,  in  gold  coin,  if  he  has  so  undertaken  ;  and  if  not,  re- 
deemable by  all  issuers  in  the  shape  of  checks  or  drafts  upon 
commercial  centres ;  and  exchangeable  for  all  commodities  in 
the  hands  of  every  holder.  Hence  it  appears  that  every- 
thing is  money  which  is  used  as  money,  and  all  money  is 
founded  on  convention  in  the  first  instance,  and  confidence  in 
the  second ;  that  what  has  thus  by  common  consent  received 


BANKING  IN  THE  UNITED  STATES. 


151 


conventional  value  will  continue  to  maintain  it ;  that  having 
cost  the  present  holders  labor,  commodities,  or  capital,  it  can  in 
like  manner  be  exchanged  by  them  for  either  of  these  when 
it  suits  their  convenience  ;  and  that  if  demonetized  by  govern- 
ment, its  value  will  be  maintained  until  it  can  be  redeemed 
and  retired,  as  is  now  being  done  in  Germany.  The  value 
of  all  money  lies  in  its  purchasing  and  paying  power ;  credit 
implies  waiting  for  payment.  The  only  essential  difference 
between  the  different  kinds  of  money,  then,  in  respect  to  the 
holder  (even  admitting  that  units  of  bank  debt  or  credit  cir- 
culate, as  in  point  of  fact  they  do  not),  lies  in  the  greater  or 
less  confidence  in  the  maintenance  of  its  purchasing  power, 
its  comparative  security  against  fraud,  force,  destruction,  or 
loss,  and  the  field  of  convention  in  which  it  is  circulated.  In 
respect  to  the  commercial  world  at  large,  and  each  commer- 
cial country,  there  is  a  difference  between  the  units  of  money, 
however,  which  upon  the  foundation  of  the  foregoing  demon- 
stration can  be  explained  and  understood,  while  upon  the  the- 
ory that  gold  coin  is  a  commodity  in  which  all  other  money 
ought  to  be  made  redeemable,  because  a  dollar  in  that  metal 
cost  a  dollar  of  labor,  it  is  utterly  incomprehensible.  Gold 
costs  its  value  in  the  miner's  labor  (if  such  be  the  fact), 
only  because  it  is  worth  that  sum  by  convention  of  the  com- 
mercial world ;  and  a  like  amount  in  bank-notes  or  a  bank 
credit,  which  is  a  power  to  draw  an  equal  amount  of  bank- 
notes, has  no  value,  it  is  said,  although  it  may  have  cost  the 
holder  an  equal  sum. 

The  essential  difference  between  gold  coin  and  inconvert- 
ible bank-notes,  and  between  gold  coin  and  inconvertible 
bank  debt  by  entry  lies  in  the  fact  that  gold,  if  there  were 
no  banks  (and  the  same  is  true  of  silver),  would  follow  in 
the  tracks,  not  of  production,  but  of  commerce,  when  loaned 
for  the  purposes  of  production  (as  is  the  case  with  nearly  all 
loans),  and  the  power  of  loaning,  or  in  other  words  of  ex- 
panding the  circulation  of  money,  by  paying  it  out  to  one 
who  is  engaged  in  producing,  would  be  very  nearly  limited 
by  the  markets  the  producer  would  be  able  to  find  for  what 
he  produced  ;  and  no  excessive  overstock  or  undue  production 


152 


POLITICAL  ECONOMY. 


would  be  possible  in  any  quarter ;  but  when  purchasing  and 
paying  power  can  be  furnished  by  the  lender  in  the  shape 
of  promissory  notes  or  book  debt,  he  is  not  limited  in  his 
power  of  lending  by  the  actual  markets,  but  only  by  the 
ability  of  the  producer  to  pay  his  loans.  There  is  no  limit 
to  his  power  of  lending,  except  the  ability  of  the  producer 
to  sell  at  a  profit  so  far  as  he  sells  at  all  for  consumption,  or 
to  a  merchant  for  holding  upon  a  rising  market ;  and  here 
lies  the  most  complicated  part  of  the  complicated  process. 
The  market  will  continue  to  grow  by  what  it  feeds  on ;  all 
prices  will  rise  by  the  general  expansion  of  circulation  to 
the  limits  of  production  of  the  kind  before  mentioned,  which 
is  all  the  time  advancing  beyond  the  ability  of  other  pro- 
ducers to  take  and  pay  for.  The  necessary  consequence  is 
that  a  large  volume  of  products  is  distributed  from  first  to 
second  and  third  hands ;  and  the  resulting  payments  of  loans 
by  the  first  class,  in  consequence  of  new  loans  to  another 
class  of  producers,  furnishes  of  itself  an  active  commerce,  and 
an  active  banking  business  in  the  United  States,  although 
it  is  as  purely  speculative  as  any  business  can  be.  The  spec- 
ulation is  masked  under  the  reality  as  well  as  the  appearance 
of  active  business.  The  consequence  is  that  a  crisis  is  the 
only  remedy;  production  is  then  contracted  together  with 
circulation  as  much  as  it  was  before  expanded  ;  and  the  total 
production  of  the  whole  cycle  of  ascent  and  descent  is  not 
equal  to  the  production  which  would  have  occurred  for  the 
same  period  under  a  stable  metallic  currency  like  that  of 
France  for  instance,  conducted  for  the  most  part  without  the 
aid  of  banks. 

EXPANSION  OF  CIRCULATION  UNDER  BANKS  OF  ISSUE,  DE- 
POSIT, AND  DISCOUNT  IN  THE  UNITED  STATES,  COMPARED 
WITH  THAT  TAKING  PLACE  UNDER  BANKS  OF  ISSUE. 

It  remains  to  show  the  exact  difference  between  the  ex- 
pansion of  circulation  possible  under  banks  of  issue,  deposit, 
and  discount,  and  banks  of  issue  only.  Banks  of  issue  whose 
notes  are  redeemable  in  coin  cannot,  if  convertibility  is  perfect, 
cause  a  very  excessive  expansion  of  circulation  ;  and  conse- 


BANKING  IN  THE  UNITED  STATES. 


153 


quently  cannot  cause  a  very  excessive  expansion  of  produc- 
tion. The  reason  why  an  exclusively  metallic  circulation, 
distributed  by,  and  following  closely  in  the  tracks  of  com- 
merce, cannot  give  rise  to  excessive  loans,  and  so  to  exces- 
sive production,  in  the  absence  of  banks,  has  been  partially 
given.  Banks  of  all  kinds  disturb  this  natural  distribution 
of  metal.  Hence  France,  in  proportion  to  commerce,  has 
more  metal  than  England,  and  England  more  than  the 
United  States.  A  comparatively  small  number  of  units  of 
bank-notes  and  bank  credits  take  the  place,  and  more  than 
the  place,  of  the  additional  units  of  metal  which  would  be 
found  were  there  no  banks,  as  in  France,  because  units  of 
bank-notes  and  units  of  credits  increase  the  whole  number 
of  units  substantially  in  the  same  way  as  a  like  number  of 
metallic  units  over  and  above  all  such  units  existing  in  the 
commercial  world,  if  suddenly  discovered  and  distributed, 
would  do  ;  and  so  of  all  such  units,  throughout  the  commer- 
cial world.  England  has  more  of  these  in  proportion  to 
commerce  than  France,  and  the  United  States  more  than 
England.  Now,  as  these  units  maintain  on  the  average  in 
France,  and  for  the  average  of  the  cycles  of  ascending  and 
descending  production  and  prices  in  England  and  the  United 
States,  a  certain  volume,  they  must  either  control,  or  be 
controlled  by,  the  volume  of  metallic  units  ;  and  the  metal- 
lic units  can  furnish  no  control  unless  they  are  allowed  to 
distribute  themselves  according  to  the  laws  of  commerce. 
Therefore,  in  order  to  furnish  such  control,  they  must  al- 
ways, on  short  averages,  be  found  circulating  in  definite  ratios 
with  the  other  units.  If  they  do  not,  and  they  surely  do 
not  in  England  and  the  United  States,  then  the  volume  of 
bank-book-credit  units  in  England  and  bank-book-credit  and 
bank-note  units  in  the  United  States,  controls  the  volume  of 
metallic  units  circulated  in  either  country. 

Steady  prices,  as  I  have  shown  in  other  chapters,  would 
necessarily  result  even  from  a  "  credit "  currency  if  produc- 
tion were  steady,  that  is  to  say  uniform,  in  all  quarters  of 
the  grand  field  of  human  industry.  The  constant  use  of  the 
term  Price,  which  means  the  number  of  units  of  money 


154 


POLITICAL  ECONOMY. 


required  to  be  given  in  exchange  for  a  given  number  of  units 
of  commodities  or  capital,  and  which  is  the  necessary  result 
of  the  use  of  money,  tends  to  conceal  from  the  understanding 
the  operative  cause  of  steady  and  unsteady  prices ;  and  to 
make  it  appear  that  what  is  only  an  effect  is  in  reality  the 
primary  cause.  If  the  demonstration  of  M.  J.  B.  Say,  in 
his  Political  Economy,  that  there  can  be  no  overproduction, 
were  as  true  practically  as  it  is  abstractly,  the  commercial 
world  would  never  need  to  give  itself  much  trouble  about 
steady  prices.  Here  is  another  instance  where  by  mere 
abstract  reasoning  effect  is  taken  for  cause,  retarding  the 
analysis  demanded  for  the  purposes  of  practical  science.  That 
there  can  be  no  overproduction  is  true  only  in  a  broad  sense, 
and  upon  long  averages  ;  while  it  is,  at  the  same  time,  only 
the  result  of  an  active  cause,  and  not  a  cause  in  itself. 

The  tendency  to  overproduction,  since  the  commencement 
of  this  century,  has  been  constantly  increasing ;  not  only 
improvements  in  machinery,  but  the  introduction  of  steam 
navigation  and  railroads,  have  caused  mankind  to  advance 
wonderfully  in  civilization.  The  most  enterprising  and  ad- 
vanced nations  are  the  most  likely  to  take  the  lead  in  that 
production  which  is  the  result  of  high  civilization  ;  but  they 
must  find  markets  for  all  they  produce,  or  limit  their  pro- 
duction by  the  markets  which  offer.  There  can  be  no  ex- 
cess of  the  absolute  necessaries  of  life  however.  These  and 
population  are  abreast,  and  production  in  this  quarter  may 
therefore  be  called  the  production  at  the  base  line,  beyond 
which  all  other  kinds  of  production  are  unable  to  go  far ; 
otherwise  they  will  be  in  advance  of  the  necessaries  of  life,  of 
population,  and  of  the  ability  to  maintain  those  exchanges 
which  are  the  foundation  of  all  society,  and  of  all  commerce. 
That  M.  J.  B.  Say,  able  thinker  and  writer  as  he  was,  did  not 
place  his  demonstration  of  the  general  or  abstract  proposition, 
that  overproduction  is  impossible,  on  this  solid  ground,  is  not 
to  be  wondered  at,  because  the  evidence  of  facts  now  known 
was  comparatively  hidden  from  him,  although  it  was  referred 
to  by  Sismondi,  Malthus,  and  perhaps  others  ;  and  he  could 
not  have  been  entirely  ignorant  of  it.    Moreover,  every  Eng- 


BANKING  IN  THE  UNITED  STATES. 


155 


lish  and  every  American  writer  since  his  time  maintains  his 
theory  and  cites  the  demonstration  Say  has  given.  Again, 
there  is  not  a  single  writer  who  has  broached  the  analysis 
and  the  argument  I  have  just  offered,  although  some  have 
claimed  that  an  excess  of  production  in  manufactures  has 
arisen  from  improved  machinery  ;  and  some  have  claimed, 
that  it  has  arisen  from  excessive  taxation.  The  error  of 
these  writers  consists  not  in  putting  effect  for  cause,  as  Say 
has  done,  but  in  making  auxiliaries  whicli,  only  bring  the 
grand  cause  itself  into  operation  more  quickly  and  efficiently 
than  otherwise,  the  cause  itself.  The  grand  cause  or  law 
which  renders  overproduction  impossible  has  been  stated ; 
the  business  of  society  is  to  produce,  and  to  exchange  surplus 
production,  and  production  is  carried  on  by  the  members  of 
society,  either  actually  or  representatively.  A  large  surplus 
in  any  quarter  that  cannot  be  exchanged  cannot  be  main- 
tained perpetually :  the  producer,  in  order  to  live,  must  seek 
some  other  place  in  the  field  of  production  if  he  produces  in 
person,  or  if  he  hires  laborers,  must  discharge  a  part  of  them, 
and  they  will  then  be  forced  to  seek  some  other  place  them- 
selves. 

This  latter  demonstration  is  sufficient  only  to  shoAV  ab- 
stractly, and  in  a  general  way,  that  there  can  be  no  over- 
production anywhere  on  the  average ;  but  it  would  also  be 
practically  sufficient,  if  all  exchanges  could  be  and  were  made 
without  loans  of  money.  Overproduction  in  any  quarter 
cannot  be  carried  far  when  the  producer  uses  only  his  own 
capital :  to  bring  it  to  the  point  of  a  commercial  crisis  he 
must  loan  not  capital,  but  purchasing  power,  which  alone 
will  procure  him  such  capital  in  the  shape  of  raw  material 
and  such  labor  as  he  wants.  But  even  then  he  cannot  carry 
his  overproduction  far  enough  to  produce  a  crisis  if  he  ap- 
pears to  be  losing  all  the  time,  as  he  would  do  if  unable  to 
sell  any  part  of  his  product  for  cost.  He  will  not  be  inclined 
to  go  very  far  in  that  direction,  nor  will  the  lender  allow  him 
to  go  far.  Moreover,  it  would  be  impossible  for  the  lender 
to  do  so  under  a  metallic  currency  without  banks,  because, 
as  just  shown,  gold  and  silver  follow  the  tracks  of  commerce, 


156 


POLITICAL  ECONOMY. 


which  distributes  for  consumption  only,  and  the  gold  would 
not  return  to  the  lender  unless  the  borrower  could  sell  and 
thus  pay  his  loan.  The  impossibility  of  the  lender's  supply- 
ing him,  and  the  loss  by  depreciation,  would,  without  any 
other  causes,  therefore,  stop  overproduction  before  a  commer- 
cial crisis.  What,  then,  is  the  cause  of  that  overproduction 
in  our  day  which  leads  to  commercial  crises  ?  If  it  cannot 
come  from  the  use  of  a  metallic  currency  without  banks,  can  it 
come  from  bank-notes,  issued  by  banks,  having  only  the  func- 
tion of  issue,  and  strictly  convertible  at  the  place  of  issue  or  a 
commercial  centre  ?  If  the  notes  are  strictly  convertible, 
it  will  not  be  very  likely  to  occur,  because  metal  will  control 
the  circulation  of  the  notes  by  circulating  on  the  short  aver- 
age, in  definite  proportions  with  them.  Redemptions  will 
be  made,  as  already  shown,  in  metal  taken  from  the  com- 
mercial world's  stock  at  large.  Overstock,  therefore,  if  over- 
stock there  were,  would  show  a  loss  by  falling,  rather  than 
a  gain  by  rising  prices ;  and  the  banks  would  be  compelled 
to  redeem  out  of  the  commercial  world's  stock  of  gold, 
which  in  case  of  overproduction  they  would  be  unable  to  pro- 
cure for  the  same  reason  the  lender  under  metallic  currency 
could  not. 

Therefore  the  cause  of  tliat  overproduction  which  leads  to 
commercial  crises  in  our  time  must  lie  with  deposit  and  dis- 
count banks,  for  all  other  supposed  causes  have  been  shown 
inadequate.  Improved  machinery  making  a  smaller  amount 
of  hand  labor  necessary  would,  by  itself,  only  demonstrate 
loss  by  overproduction  the  quicker,  while  taxes  and  tariffs 
would  have  the  same  effect. 

Where,  then,  lies  the  cause?  Is  it  possible  to  demonstrate 
exactly  in  what  part  of  deposit  and  discount  banking  it  lies  ? 
I  affirm  that  it  is  possible,  and  proceed  to  offer  the  demon- 
stration, premising,  to  avoid  misconception,  that  I  do  not 
affirm  deposit  and  discount  banking  in  itself  to  be  the  para- 
mount cause  of  commercial,  industrial,  and  banking  crises, 
but  the  system  of  loaning  money  which  knowing  and  having 
no  limitation  whatever  to  loans,  short  of  such  a  crisis,  con- 
ceals the  growing  cause  of  the  crisis  (overstock)  from  the 


BANKING  IN  THE  UNITED  STATES. 


157 


eyes  of  the  industrial,  commercial,  and  banking  world  by 
making  it  develop  a  rising  instead  of  a  falling  scale  of  prices. 
Thus,  after  a  partial  and  not  dangerous  overstock  has  made 
its  appearance,  by  reason  of  a  failure  of  crops  or  other  cause 
affecting  demand  and  supply,  if  no  more  loans  under  a 
metallic  currency  without  banks  are  to  be  had,  because  no 
more  coin  has  yet  found  its  way  back  to  the  reserves  of  the 
lenders  by  sales  of  commodities,  the  prices  of  the  overstock 
will  fall  immediately,  and  instead  of  being  misled  by  a  rise 
into  more  production,  the  manufacturer  will  sell  what  he  has 
at  lower  prices  until  the  equilibrium  of  prices  is  restored ; 
but  if  he  could  borrow  money  freely  he  would,  by  rising 
prices,  be  induced  to  increase  rather  than  diminish  his  over- 
stock. The  paramount  forces  at  work  then  are,  1st,  the  law 
which  maintains  population  abreast  of  the  production  of  the 
necessaries  of  life  ;  2d,  the  fact  that  it  is  now  possible  to 
produce  the  relative  necessaries  which  result  from  civilization 
and  progress  in  advance  of  absolute  necessaries  and  therefore 
of  population.  The  counteracting  forces  are  the  loss  of  capi- 
tal that  occurs  by  overstock,  and  the  impossibility  of  obtain- 
ing money  to  buy  more  material  and  labor  until  the  overstock 
is  sold.  If  overstock  in  any  quarter  were  impossible,  paper 
and  credit  money  issued  by  sound  banks  would  give  steady 
prices,  as  I  have  demonstrated  in  another  chapter,  without  the 
aid  of  metal.  Because  overstock,  however,  is  not  only  possi- 
ble, but  very  likely  to  occur,  a  kind  of  circulation  that  will 
maintain  steady  prices  must,  e  converso^  check  overstock  at  a 
point  far  distant  from  and  before  a  commercial  crisis.  There- 
fore, inasmuch  as  in  point  of  fact  there  is  no  limit  to  deposit 
and  discount  loans  short  of  a  crisis,  because  there  is  no  limit 
to  circulation  in  the  reserve,  and  prices  are  in  the  ascending 
scale  until  the  signs  of  a  coming  crisis  appear,  we  have,  in 
the  loans  of  deposit  and  discount  banks,  and  the  ascending 
scale  of  prices  their  loans  produce,  precisely  the  factors  which 
impede  or  prevent  the  operation  of  the  counteracting  forces 
above  mentioned,  which  tend  to  prevent  overstock  reaching 
that  extent  which  causes  a  crisis.  The  first  of  these  factors 
is  the  unlimited  power  of  loaning  in  the  United  States.  And 


158 


POLITICAL  ECONOMY. 


why  is  it  unlimited  ?  A  brief  and  rigorous  analysis  will  de- 
velop the  cause,  with  a  certainty  almost  equaling  that  of  a 
mathematical  demonstration.  Out  of  pig  iron,  wool,  lum- 
ber, building  materials,  cotton,  etc.,  let  us  select  cotton. 
Under  a  metallic  currency,  without  banks,  if  advances  are 
made  to  a  cotton  planter  by  a  neighboring  capitalist  or  mer- 
chant, and  the  cotton  planter  forwards  his  cotton  to  New 
Orleans,  or  sells  to  a  buyer  who  does  so,  the  bill  is  paid  in 
gold  at  New  Orleans  out  of  the  commercial  world's  stock  at 
large,  which  is  distributed  in  the  tracks  of  commerce.  The 
expansion  of  circulation  which  took  place  at  the  cotton 
planter's  home  was  in  consequence  of  the  production  of  a 
new  commodity  ;  this  expansion  is  retired  at  the  place  where 
it  occurred,  but  follows  the  cotton  to  New  Orleans,  or  rather 
reappears  on  its  arrival,  through  a  new  loan  made  by  a  cotton 
factor  there.  He  forwards  the  cotton  to  a  point  between 
New  Orleans  and  New  York  and  sells  it  there.  The  expan- 
sion of  circulation  at  New  Orleans  is  retired  by  an  expansion 
at  the  intermediate  point,  occurring  as  before  in  consequence 
of  a  loan.  Thus  all  the  expansions  are  retired  from  time  to 
time  as  the  cotton  leaves  one  point  and  is  carried  to  another ; 
and  finall}^  it  is  located  where  the  cotton  is  located  at  the 
intermediate  point.  At  last  the  buyer  at  the  intermediate 
point,  finding  no  market  there,  consigns  it  to  New  York  city 
and  it  is  sold  to  a  cotton  factor,  who  sells  it  to  a  manufact- 
urer in  the  country.  He  borrows  in  the  shape  of  a  bill  of 
exchange  on  New  York  city  forwarded  from  his  place  of 
business  to  the  intermediate  point,  and  takes  the  cotton 
home.  All  previous  expansions  are  thus  retired  by  the  last 
and  final  expansion  caused  by  the  manufacturer's  loan.  Had 
there  been  banks  of  issue  at  all  the  points,  but  no  banks  of 
deposit  and  discount  in  the  United  States,  the  mode  of  pay- 
ment, that  is  to  say  of  contracting  and  expanding  circulation, 
would  have  been  the  same,  viz,  by  bills  of  exchange;  and 
these  bills  would  have  been  paid  out  of  the  commercial 
world's  stock  of  gold,  or  bank-notes  payable  out  of  that  fund, 
and  not  out  of  a  consolidated  fund  of  gold.  The  important 
fact  to  be  noticed  is,  that  while  the  payment  of  each  loan 


BANKING  IN  THE  UNITFD  STATES. 


159 


places  the  lender  who  made  it  precisely  where  he  was  before 
the  loan,  the  power  of  all  lenders  to  make  further  loans  is 
diminished  by  the  last  cost  of  the  cotton  until  the  manufact- 
urer can  produce  and  sell  his  cloth.  There  has  been  an 
expansion  of  circulation  equal  to  the  value  of  the  cotton 
marketed,  and  unless  it  is  retired  in  due  season  by  a  sale 
and  consumption  of  cotton  goods,  it  will  produce  a  rising 
scale  of  general  prices  if  many  similar  instances  occur.  But 
this  is  impossible,  because  the  means  of  the  last  lender  are 
exhausted  to  the  extent  of  the  loan,  and  they  can  only  be 
restored  by  a  sale  of  cotton  goods.  The  exhaustion  of  his 
means,  moreover,  does  not  restore  another's  means.  This 
exhaustion  is  not  counteracted,  as  it  could  be  under  deposit 
and  discount  banking,  by  a  deposit  of  the  gold  paid  out  on 
the  bill  of  exchange  issued  upon  the  last  loan  into  a  bank,  , 
which  would  thus,  by  virtue  of  that  very  expansion  of  cir- 
culation caused  by  the  last  loan,  be  enabled  to  expand  cir- 
culation as  much  more,  instead  of  contracting  it.  Take  now 
the  case  of  the  same  cotton,  under  a  fully  developed  system 
of  deposit  and  discount  banking.  The  original  advances  at 
the  cotton  planter's  home  may  be  made  by  a  bank:  whether 
bank-notes  are  paid  out  or  credit  only  is  given  and  trans- 
ferred by  clearing,  it  is  all  one,  as  previously  shown  :  the  ex- 
pansion at  the  planter's  home,  which  arose  with  the  cotton, 
is  retired  by  means  of  a  bank  loan  at  New  Orleans ;  at  New 
Orleans  by  a  loan  at  the  intermediate  point :  and  at  the  lat- 
ter by  a  bank  loan  at  a  manufacturer's  residence.  The  ex- 
pansions and  contractions  are  precisely  the  same  as  before, 
and  are  effected  through  checks  or  drafts  instead  of  bills  of 
exchange.  The  last  bank  draws  upon  its  correspondent 
bank  in  New  York,  which  is  in  debt  to  it,  and  the  effect  is 
simply  to  transfer  to  some  other  bank  in  New  York  an  equal 
sum  of  gold  or  notes  in  the  bank  which  holds  the  reserve 
(consolidated  it  may  be  called)  of  all  the' city  banks.  This 
last  expansion  precisely  equals  each  of  the  previous  contrac- 
tions :  it  corresponds  exactly  to  the  value  of  the  cotton  just 
marketed,  and  is  entirely  legitimate  and  proper  as  in  the  case 
of  the  metallic  circulation,  and  the  case  of  convertible  notes, 


160 


POLITICAL  ECONOMY. 


if  it  does  not  give  rise  to  a  further  expansion  by  enabling 
the  city  bank,  whose  deposits  have  thus  been  increased,  to 
make  this  increase  the  foundation  of  further  loans.  If  it  does, 
and  it  surely  will,  the  marketing  of  the  cotton,  worth  say 
ten  thousand  dollars,  has  given  rise  to  an  expansion  of  cir- 
culation to  the  amount  of  twenty  thousand  dollars,  and  the 
last  expansion  may  give  rise  to  a  third. 

Again,  the  cotton  is  manufactured  fast  enough  but  does  not 
sell :  the  rising  scale  of  prices,  nevertheless,  conceals  from  the 
eyes  of  the  banks,  the  manufacturers,  and  the  merchants,  the 
real  facts  of  the  case,  because  the  rising  scale  seems  to  come 
from  the  legitimate  demands  of  commerce,  in  behalf  of  actual 
consumers.  The  cotton  manufacturer,  therefore,  sells  his 
cotton  goods,  which  consumers  do  not  want,  to  a  merchant, 
who  supposes  that  the  rising  market  is  really  a  market  of 
consumers.  This  merchant,  in  order  to  buy  the  goods,  makes 
a  loan  in  another  city  bank,  and  pays  the  manufacturer,  who 
can  thus  pay  his  loan  to  his  country  bank,  which,  deceived  by 
the  same  appearance,  thinks  itself  enabled  to  make  another 
loan  of  equal  amount  to  the  manfacturer,  who  buys  cotton 
again,  but  rather  less  in  quantity,  because  the  rising  scale  of 
prices  has  carried  up  the  price  of  cotton.  In  this  way  a 
third,  or  perhaps  a  fourth,  expansion  of  circulation  occurs,  in 
consequence  of  the  marketing  of  the  first  lot  of  cotton,  when 
under  a  metallic  or  convertible  note  circulation  only  one,  or 
certainly,  on  the  average,  much  less  than  two  expansions 
could  have  been  maintained  at  the  same  time  out  of  the  same 
lot  of  cotton.  Now,  inasmuch  as  there  is  no  assignable  limit 
in  figures  to  the  power  of  circulating  money  in  the  reserve, 
and  therefore  none  to  the  power  of  making  and  taking  such 
loans  aside  from  their  ultimate  effects,  the  only  practical 
limit  is  a  commercial  crisis,  which  brings  into  operation  the 
paramount  causes  to  which  all  others  are  subordinate.  There 
is  no  essential  difference  between  the  cases  of  the  metallic, 
the  convertible  note,  and  the  deposit  and  discount  circulation, 
except  that  in  the  latter  expansion  of  circulation  is  piled  on 
expansion  of  circulation,  causing  production  to  be  piled  on 
production  without  exchanges  of  the  products  for  other  prod- 


BANKING  IN  THE  UNITED  STATES. 


161 


ucts  taking  place,  until  the  exchanges  are  so  blocked  that  a 
crisis  is  unavoidable.  Convertible  notes  outside  of  commer- 
cial centres,  and  in  commercial  centres  gold  coin,  might  be 
paid  out  without  any  kind  of  clearing,  transfer  of  bank  debt, 
or  setting  off  of  bank  debt  against  their  own  debt  due  banks 
by  customers,  thus  making  the  whole  circulation  of  the  United 
States  under  "specie  payments  "  that  of  metal  and  strictly 
convertible  bank-notes ;  and  the  result  would  still  be  precisely 
the  same.  "  Clearings  "  seem  to  demonstrate  to  the  under- 
standing that  a  bank  deals  largely  in  the  debts  due  it  by 
other  banks,  and  in  fact  redeems  its  own  liabilities  in  the 
shape  of  book  debt  by  transferring,  first  or  last,  to  the  party 
demanding  redemption,  book  debt  due  it  from  other  banks, 
while  the  customers  of  all  banks  seem  to  pay  each  other  by 
transferring  to  each  other  the  indebtedness  to  them  by  book 
of  all  banks,  yet  the  analysis  before  made  demonstrates  to 
a  certainty  that  every  payment  to  a  bank  customer  is  the 
source  of  a  deposit  by  another  customer,  and  a  loan  in  con- 
sequence to  a  third  customer,  converting  even  a  metallic  cir- 
culation substantially  into  what  is  called  a  credit  or  debt 
circulation.  The  latter  term,  however,  is  entirely  a  misno- 
mer ;  the  actual  change  accomplished  by  abandoning  the  first 
two  monetary  systems  is  from  a  circulation  in  the  tracks  of 
commerce,  limited  within  short  periods  by  consumption,  into 
one  limited  only  by  production,  and  therefore  by  a  commer- 
cial crisis.  In  addition  to  that  of  science  we  have  thus  a 
practical  demonstration  of  the  truth,  that  the  only  essential 
difference  between  one  kind  of  circulation  and  another  con- 
sists not  in  the  kind  of  money  used,  whether  metal  or  not, 
but  in  the  limitations  imposed  upon  the  act  of  circulation  by 
surrounding  conditions. 

A  better  word  than  circulation  might  perhaps  be  employed 
to  convey  a  correct  idea  of  the  process  of  carrying  on  the 
exchanges  of  the  social  system  by  means  of  units  of  valua- 
tion, and  of  purchasing  and  paying  power.  The  danger  of 
misconception  of  what  actually  takes  place,  and  of  what 
ought  to  take  place  in  order  to  maintain  steady  prices,  lies 
in  the  fact  that  circulation  may  and  probably  does  lead  to 
11 


162 


POLITICAL  ECONOMY. 


the  idea  that  money,  after  it  is  paid  out  to  the  borrower  in 
exchange  for  his  note  or  bill  by  the  lender,  is  paid  out  many 
times,  and  ought,  in  due  course,  to  reach  many  hands  and 
continue  a  long  time  out  before  it  is  returned  to  the  lender. 
This  idea  is  erroneous.  In  order  to  maintain  steady  prices 
with  either  private  or  bank  loans  the  money  must  be  paid 
out  by  the  producer,  if  a  merchant,  either  directly,  or  through 
another  merchant  or  merchants  indirectly  to  the  first  pro- 
ducer, and  from  him  for  labor  or  raw  material ;  thence  for 
the  most  part  from  the  laborers  or  sellers  of  raw  material 
within  short  periods  to  dealers  and  others  who  will  require  it  to 
be  redeemed  in  exchange  on  commercial  centres.  This  latter 
redemption,  instead  of  being  made  the  foundation  of  further 
loans  by  other  banks  by  virtue  of  redeposit,  ought  to  prevent 
the  redeeming  bank  from  making  further  loans  until  its 
metallic  reserve,  if  below  a  minimum  average,  is  brought  up 
by  payment  of  loans  through  producers'  sales  to  minimum 
average  again.  This  would  necessarily  take  place  under  a 
sound  and  well  conducted  system  of  banks  of  issue  without 
deposit  and  discount,  because  were  the  banks  to  continue  to 
loan,  the  reserve  would  soon  be  exhausted,  and  could  not  be 
replenished  out  of  the  commercial  world's  stock  until  pro- 
ducers could  by  sales  carry  it  back,  following  the  tracks  of 
commerce,  to  the  issuing  banks.  The  metal  in  the  reserves 
of  a  connected  series  of  deposit  and  discount  banks  kept  in 
no  definite  ratio  to  debt  is  merely  ballast :  it  cannot  follow 
the  tracks  of  commerce :  it  cannot  form  on  the  average  a  def- 
inite portion  of  the  purchasing  power  of  every  transaction 
as  it  does  with  well  conducted  banks  of  issue.  Therefore, 
inasmuch  as  the  metal  is  by  means  of  deposit  and  discount 
banking  artificially  kept  out  of  the  tracks  of  commerce,  and 
its  regulating  power  in  the  way  of  putting  limits  to  possible 
circulation  through  bank  loans  in  this  manner  artificially 
lost,  it  must  by  artificial  means  be  forced  back  into  the 
tracks  of  commerce,  and  this  can  be  done  only  by  each  bank 
establishing  the  same  minimum  ratio  of  metallic  reserve  to 
liabilities,  below  which  it  will  never  loan  and  never  intention- 
ally make  a  loan  which  will  be  likely  to  carry  and  keep  it  be- 


BANKING  IN  THE  UNITED  STATES. 


163 


low  for  any  considerable  time.  Such  a  system  is  possible,  and 
would  be  practicable  if  all  banks  were  as  well  managed  as 
some  banks  are,  but  utterly  useless  unless  generally  enforced. 
The  difficulty  is  the  self-discipline  required  in  stopping  loans 
when  one  is  not  absolutely  compelled  to  stop.  Here  lies 
"  practically  "  the  difference  between  a  metallic  circulation 
without  banks,  or  a  well-conducted  system  of  banks  of  issue 
only,  and  deposit  and  discount  banking.  In  the  former  two 
cases  I  would  gives  way  to  I  cannot ;  in  the  \2XX:Qy  I  cannot  to 
I  would.  In  the  May  and  June  numbers  of  the  "  Bankers' 
Magazine,"  N.  Y.  (pp.  876,  968),  1875,  I  maintained  the 
necessity  of  a  minimum  ratio  of  metallic  reserve  to  liabilities, 
but  I  did  not  and  could  not,  as  before  stated,  demonstrate  the 
absolute  necessity  of  it  to  steadiness  of  prices,  because  I  then 
supposed  metalUc  money  to  be  a  commodity,  having  value 
equal  to  the  labor  it  cost.  Having,  after  much  reflection,  ar- 
rived at  the  conclusion  that  it  is  not  a  commodity,  and  having 
at  last  succeeded  in  demonstrating  in  a  former  chaj)ter  that 
it  is  not ;  that  nothing  circulates  but  money,  and  that  money 
consists  of  a  series  of  units  of  conventional  valuing,  pur- 
chasing, and  paying  power,  whether  the  units  of  circulation 
are  of  coin,  bank-notes,  or  bank  credit,  and  that  there  can  be 
no  ascending  or  descending  scale  of  prices  without  the  employ- 
ment of  such  units,  —  the  material  question  being,  What  is 
the  number  ?  and  not.  What  is  the  kind  of  units  employed  ? 
I  have  been  enabled  clearly  to  demonstrate  that  there  must 
be  a  fixed  ratio  artificially  maintained  in  order  to  maintain 
steadiness.  In  nations  possessed  of  such  immense  productive 
energy  as  the  United  States  and  England,  which  have  been 
for  more  than  two  generations  moving  in  ascending  and 
descending  cycles  of  productive  energy,  and  consequently 
of  production,  and  of  rising  and  falling  prices  as  a  neces- 
sary attendant  upon  these,  while  France  has  moved  in  cycles 
of  political  revolution,  although  her  productive  energies 
have  been  steadied  by  a  metallic  currency  following  the 
tracks  of  commerce,  it  would  be  useless  to  maintain  that 
steadiness  of  production,  and  therefore  of  prices,  can  be  at 
once  perfectly  maintained  by  regulating  banking  reser^e. 


164 


POLITICAL  ECONOMY. 


One  thing  is  certain,  however:  there  is  no  other  mode  of 
regulating  bank  loans ;  and  a  rigid  adherence  to  it,  if  it  be 
possible  to  enforce  it,  would  force  accumulations  of  overstock 
into  market  at  short  instead  of  long  intervals,  and  cause  a 
progressive  increase  of  steadiness. 

SUMMARY  OF  BANKING  IN  THE  UNITED  STATES. 

The  essential  difference  between  banking  in  the  United 
States  as  we  find  it  and  as  it  would  be  with  a  gigantic  bank 
of  issue  and  branches,  or  with  numerous  banks,  independent 
of  each  other,  capable  of  supplying  all  the  currency  required, 
but  without  the  functions  of  deposit  and  discount,  is  this : 
that  while  under  all  systems  of  banking,  bank  debt,  in  what- 
ever form  it  appears,  —  whether  in  that  of  book  entry  or 
note,  —  is  regularly  redeemed  in  some  manner,  and  largely 
in  metal,  in  banks  of  issue  it  is  redeemed  in  metal  taken 
from  the  commercial  world's  stock  at  large  following  in  the 
tracks  of  commerce ;  and  the  redemptions  of  one  bank  are 
not  the  foundation  for  the  discounts  of  another.  Under 
banks  possessing  the  functions  of  issue,  deposit,  and  discount 
without  a  regulated  reserve,  bank  debt  is  redeemed  out  of  a 
reserve  which  has  no  relation  whatever  to  commerce,  and  is 
replenished,  not  by  gold  taken  from  the  commercial  world's 
stock,  but  by  gold  moving  all  the  time  out  of  one  banking 
reserve  into  another,  thus  making  all  banking  reserves  virt- 
ually one.  The  difference  between  the  two  kinds  of  bank- 
ing lies  not  in  the  generally  supposed  fact  that  a  bank  of 
issue  redeems  in  gold,  while  a  bank  of  deposit  and  discount 
redeems  in  bank  credit,  because  it  has  nothing  else  to  redeem 
in.  It  is  a  great  mistake  to  suppose  anything  of  this  kind. 
There  is  the  same  necessity  for  redemptions  under  one  kind 
of  banking  as  under  another.  Nine  tenths  of  all  redemptions 
take  place  in  the  regular  course  of  business,  —  the  business 
of  internal  commerce.  The  object  of  commercial  redemp- 
tions by  banks  is  to  enable  merchants  to  pay  for  their  pur- 
chases at  commercial  centres  by  means  of  checks  and  drafts. 
Bank  debt  by  note  and  book  is  thus  redeemed ;  the  debt  by 
note  being  usually  converted  from  time  to  time  into  debt  by 


BANKING  IN  THE  UNITED  STATES. 


165 


book,  which  is  retired  by  redemption  through  contraction. 
This  redemption  consists  in  a  transfer  by  the  depositor, 
through  the  instrumentality  of  a  check,  of  bank  debt  at  the 
commercial  centre  belonging  to  the  country  bank  received  in 
exchange  for  the  debt  of  the  latter  to  the  depositor,  assigned 
by  his  indorsement  to  the  city  dealer,  and  by  the  latter  di- 
rectly or  indirectly  through  a  check  set  off  against  his  debt 
by  bill  or  note  due  a  bank  there. 

Meanwhile  the  notes  thus  received  from  time  to  time 
have,  before  redemptions  take  place,  been  loaned  to  pro- 
ducers, which  would  have  been  impossible  with  banks  of 
issue,  and  the  bank  has  in  its  portfolio  the  notes  or  bills  of 
producers  to  show  for  the  amounts  thus  loaned  and  after- 
wards taken  from  its  reserve  at  the  commercial  centre.  All 
loans,  therefore,  come  out  of  reserve,  first  or  last,  and  every 
loan  is  immediately  the  cause  of  a  diminution  of  the  ratio  of 
bank  reserve  to  bank  debt.  This  is  precisely  the  case  with 
banks  of  issue.  With  rigorous  accuracy,  therefore,  it  may 
be  said  that  all  money  is  founded  on  credit  and  confidence, 
not  excepting  coined  metal  ;  that  in  all  banks  loans  are 
made  out  of  reserve,  because  a  bank  has  no  other  fund  to 
loan  from  ;  the  equation  under  all  circumstances  being  : 
Deposits  minus  Deposit  Loans  equal  Reserve.  Hence  the 
difference  in  the  two  kinds  of  banking  in  respect  to  redemp- 
tions consists  in  the  ratio  of  reserve  to  liabilities,  and  the 
manner  of  replenishing  reserve. 

Finally,  not  to  describe  fully  the  part  in  the  grand  busi- 
ness of  production  played  by  savings  banks  in  the  United 
States  would  be  to  leave  out  the  part  of  an  important  auxil- 
iary. These  banks  receive  the  savings  out  of  the  vast  field 
of  productive  labor  chiefly  engaged  outside  of  the  absolute 
necessaries  of  life.  The  savings  of  labor  are  redeposited  to  a 
considerable  extent  by  savings  banks  in  commercial  banks. 
They  are  loaned  to  the  same  producers  who  borrowed  them 
before,  without  any  redemption  having  taken  place  at  all, 
because  these  are  savings  and  have  led  to  no  consumption  as 
yet,  the  commercial  banks  being  thus  far  merely  depositaries 
and  the  savings  banks  making  all  the  loans.    It  would  not 


166 


POLITICAL  ECONOMY. 


be  true,  therefore,  to  say  that  savings  banks  are  the  auxil- 
iaries of  commercial  banks  in  making  loans  in  the  start,  but 
they  are  potent  auxiliaries  in  creating  overstock,  so  far  as 
their  loans  are  made  to  the  owners  of  what  is  called  quick, 
and  not  fixed,  capital. 

Perhaps  it  is  of  little  use  to  undertake  to  demonstrate  the 
true  principles  of  production  and  exchange  of  commodities 
by  means  of  that  system  or  process  of  giving  units  of  valu- 
ing, purchasing,  and  paying  power  called  money.  The  fal- 
lacies which  pass  for  truth  have  so  much  that  is  true  mixed 
with  the  false  that  it  is  hard  to  convince  the  understanding 
of  the  truth,  even  by  actual  demonstration.  All  money  is 
substantially  the  same ;  the  difference  is  in  the  field  of  use. 
Gold  and  silver  coin  in  a  consolidated  reserve  furnish  a  cir- 
culation substantially  the  same  as  that  of  units  of  credit. 
When,  however,  allowed  to  circulate  in  the  tracks  of  the 
commercial  world's  commerce,  and  distributed  by  units  of 
weight,  its  circulation  approaches  nearer  than  any  other  can 
to  the  steady  circulation  we  should  always  have,  no  matter 
whether  it  were  metal  or  not,  if  production  throughout  the 
commercial  world  were  in  harmony. 

There  is  but  one  remedy :  to  make  every  application  for 
a  loan  depend  upon  the  banker's  response  to  this  question, 
Will  the  loan,  if  made,  carry  my  reserve  below  the  mini- 
mum ratio  established  by  law  ?  If  it  will,  I  cannot  make 
the  loan ;  if  it  will  not,  I  can.  Granted  the  possibility  of 
carrying  out  sach  a  law,  if  made,  and  assuming  that  it  has 
been  actually  passed  and  carried  into  effect,  coin  will  form  a 
part  of  the  whole  circulation  going  on  outside  of  banks,  and 
will  have  the  same  ratio  to  it  that  reserve  will  have  to  that 
part  of  deposits  which  is  bank  debt.  The  proportion  will 
be,  —  Written  Bank  Debt  circulating  outside  of  banks  :  Coin 
circulating  outside  of  banks  :  :  Bank  Debt  by  Book  :  Coin 
Reserve.  It  is  impossible  to  have  a  bank-debt  unit  circula- 
tion of  any  kind  (whether  it  be  debt  by  book  or  note)  regu- 
lated by  a  metallic  reserve,  unless  the  units  of  metal  circu- 
late in  definite  proportions  with  the  units  of  credit.  Such 
was  the  kind  of  circulation  in  Scotland  in  Adam  Smith's 


BANKING  IN  THE  UNITED  STATES. 


167 


time  ;  such  would  it  be  in  the  United  States,  even  with  de- 
posit and  discount  banking,  if  all  production  were  harmo- 
nious, because  whatever  reserve  a  bank  might  begin  with, 
the  payments  into  it  would  on  short  averages  equal  the  pay- 
ments out  of  it.  Harmonious  production  would  surely  give 
steady  prices  even  to  a  currency  of  units  of  bank  debt, 
whether  by  note  alone,  note  and  book  debt,  or  book  debt 
circulated  by  the  instrumentality  of  checks.  Therefore  it 
follows,  e  converse^  that  the  maintenance  of  steady  prices 
obtained  by  the  use  of  an  entirely  metallic  circulation,  or  by 
a  circulation  of  units  of  bank  debt  kept  in  definite  ratio  to 
units  of  metal  in  the  reserve,  will  maintain  steady  and  har- 
monious production.  The  understanding  must  be  relieved 
entirely  of  the  fallacy  that  gold  coin  is  a  commodity  because 
it  cost  all  it  is  worth  to  mine,  smelt,  and  assay  it,  and  thus 
enabled  at  last  clearly  to  perceive  that  the  whole  value  of 
coin,  as  of  all  money  whatever,  is  conventional  and  lies  in 
its  purchasing  power.  The  implied  guaranty  of  the  contin- 
uance of  this  conventional  value  as  to  the  coin  of  any  one 
metal,  on  the  part  of  governments  representing  commercial 
communities,  until  in  due  course  redeemed  by  coin  of  other 
metal,  and  the  express  guaranty  on  the  part  of  banks  to  re- 
deem in  metal,  will  then,  when  fully  understood,  furnish  a 
foundation  for  the  knowledge  of  monetary  science.  The  only 
cost  value  of  gold  coin  lies  in  the  last  purchases  it  has  accom- 
plished, precisely  as  with  paper  or  credit  money.  If  ten 
thousand  dollars  in  gold  coin  buys  ten  thousand  dollars' 
worth  of  cotton  goods  to-day,  it  has  then  cost  exactly  that 
sum  reckoned  in  goods,  and  that  cost  redeemed  its  preced- 
ing cost  in  goods,  if  it  had  ever  been  paid  out  before  since  it 
was  mined,  smelted,  and  assayed.  So  of  units  pf  "bank-notes 
or  credits.  Before  gold  is  coined  for  the  first  time,  the  guar- 
anty of  governments  on  behalf  of  the  commercial  world 
is  that  it  shall  continue  to  pass  like  all  other  gold  ;  and  be- 
fore units  of  bank  debt  are  issued  for  the  first  time,  the  bank 
guaranties  that  they  shall  be  always  convertible  into  coin. 
If  ten  thousand  dollars  is  paid  out  to-day  in  good  bank 
debt  for  cotton  goods  of  that  value,  the  seller  has  no  re- 


168 


POLITICAL  ECONOMY. 


course  or  further  claim  on  the  buyer ;  the  bank  debt,  which 
is  a  power  to  put  in  circulation  a  like  amount  of  gold  in  the 
reserve,  thus  passed  to  the  seller,  has  cost  ten  thousand  dol- 
lars in  goods,  and  is  therefore  intrinsically  worth  that  sum, 
because  it  has  cost  it.  If  governments  were  to  demonetize 
the  metal  of  which  the  coin  is  made,  without  providing  for 
its  redemption  by  other  metal  or  by  government  notes,  and 
the  community  were  to  act  upon  the  demonetization,  the 
conventional  value  of  the  metal  would  depart,  and  with  it  the 
foundation  of  the  conventional  and  the  guarantied  value  of 
the  bank  debt,  unless  it  were  to  continue  to  circulate  as  debt 
redeemable  always  in  purchasing  power  of  a  like  kind  in 
the  shape  of  notes  or  bank  credit,  through  its  conventional  ex- 
change value,  like  all  irredeemable  bank  debt ;  the  guaranty 
of  the  bank  then  and  thus  being  changed  virtually  into  a 
guaranty  of  a  continuation  of  purchasing  power  by  redemp- 
tion with  units  of  credit  that  shall  continue  to  have  like  power. 

The  foundation  of  all  money,  then,  is  credit  and  confidence 
in  the  issuer ;  as  to  coin,  credit  and  confidence  that  the  gov- 
ernment will  not  demonetize  the  material  of  coin  without  re- 
deeming by  another,  and  as  to  bank  debt,  that  banks  will 
always  redeem  in  coin  so  long  as  it  is  not  demonetized,  and 
under  all  circumstances,  even  if  demonetized,  will  maintain 
the  purchasing  and  paying  power  of  their  debt.  There  is 
nothing  whatever  in  the  nature  of  circulation,  as  effected 
through  banks  when  rightly  understood,  that  is  in  point  of 
the  true  science  of  money  and  exchange  peculiar  to  banks, 
except  the  maintenance  of  loans  to  customers.  If  the  circu- 
lation of  the  United  States  were  entirely  metallic,  without 
banks,  and  all  the  business  men  and  capitalists  of  New  York 
city,  being-  by  supposition  of  good  credit,  and  mutually  en- 
titled to  each  other's  confidence,  were  to  consolidate  their 
money  reserves  to  t]je  amount  of  say  fifty  millions  in  one 
bank,  managed  by  themselves  or  agents,  with  the  under- 
standing that  any  one  might  draw  out  upon  check  in  coin  to 
twice  the  amount  of  coin  he  might  at  any  time  have  to  his 
credit,  every  joint  owner  in  the  bank  agreeing  to  deposit  and 
keep  all  his  receipts  of  money  in  the  bank,  the  right  to  draw 


BANKING  IN  THE  UNITED  STATES.  169 


out  money  upon  check  to  the  limit  named  being  made  subject 
to  the  proviso  that  the  coin  in  deposit  should  never  be  re- 
duced below  the  ratio  of  one  in  coin  to  four  in  the  indebt- 
edness of  the  bank  to  depositors,  which  is  always  equal  to 
the  indebtedness  of  depositors  to  the  bank,  —  the  bank  of 
course  at  all  times  owing  depositors  who  do  not  borrow  the 
same  amount  that  depositors  who  do  borrow  owe  the  bank, 
—  we  should  have  a  bank  conducted,  with  only  one  impor- 
tant difference,  upon  the  same  principle  as  deposit  and  dis- 
count banks  are  now  conducted  in  England  and  in  the  United 
States  ;  and  what  is  that  difference  ?  It  lies  not  in  the  fact 
that  in  the  case  I  have  supposed  the  depositors  make  the 
profits,  and  the  banks  in  the  other  ;  but  in  the  fact  that  I 
have  in  this  case  supposed  the  coin  to  be  kept  in  definite 
ratio  to  h abilities,  causing  steady  prices,  after  the  surplus 
gold  thrown  upon  the  domestic  market,  by  the  overdrafts  of 
those  who  might  overdraw  for  their  own  use  in  production,  ■ 
or  to  lend  to  others  for  that  purpose,  had  been  distributed 
throughout  the  commercial  world.  To  every  one  who  chooses 
to  study  the  case  I  have  supposed,  it  must  be  plain  that 
no  bank  credit,  no  bank  debt,  and  no  depositor's  debt  cir- 
culates, or  is  cleared.  Coin  is  always  paid  out  and  nothing 
else ;  coin  is  always  received,  and  nothing  else ;  and  nothing 
circulates  in  the  community  but  coin.  There  is  an  economy 
of  coin  to  the  amount  of  seventy-five  per  cent,  obtained  at 
the  cost  of  spreading  the  seventy-five  per  cent,  saved  at 
home  over  the  metallic  supply  of  the  world.  A  large  ratio 
for  home  cornmerce,  a  small  one  for  the  world's  commerce : 
but  the  economy  is  only  apparent  because  it  raises  prices  for 
buyers  as  well  as  sellers.  The  bank  owes  precisely  the 
amount  of  its  reserve  in  coin  plus  accounts  overdrawn,  and 
so  has  a  dollar  in  coin  for  every  four  dollars  of  liabilities. 
There  is  no  circulation  however  of  bank  debt,  nor  can  the 
debt  of  depositors  to  the  bank  be  circulated.  The  debt  has 
no  objective  reality  as  money  in  itself  ;  it  is  only  the  result  of 
overdrafts  upon  the  coin ;  the  payment  in  full  hy  depositors 
of  their  debt  to  the  bank  would  restore  the  original  deposit 
of  coin,  with  the  subsequent  gains;  so  the  payment  in  full  to 


170 


POLITICAL  ECONOMY. 


depositors  by  the  Englisli  and  American  banks  would  restore 
the  original  deposit  of  coin  and  bank-notes.  In  the  case  I 
have  supposed,  the  first  debt  of  all  is  that  of  depositors  to  the 
bank,  and  not  that  of  the  bank  to  depositors :  debtors  and 
creditors  are  exactly  reversed  and  changed  from  the  positions 
they  occupy  in  banks  to-day.  My  object  in  supposing  the 
case  was  to  demonstrate  to  an  absolute  certainty  to  American 
bankers  that  a  bank  deals  always  in  coin  or  bank-notes,  or 
both :  and  that  the  debt  is  merely  the  result  of  economizing 
the  total  of  coin  and  notes,  by  means  of  a  consolidated  reserve ; 
and  to  demonstrate  also,  in  a  very  practical  way,  that  the 
fallacy  of  supposing  that  a  bank  deals  in  debt  comes  from 
supposing  coin  to  be  a  commodity.  How  can  it  be  an  ordi- 
nary commodity  if  one  quarter  of  it  can  take  the  place  of 
the  whole  ?  The  first  fallacy  puts  effect  for  cause  ;  the  sec- 
ond, cause  for  effect.  The  debt  in  which  the  writers  upon 
money  affirm  banks  deal,  is  the  result  of  economizing  coin 
and  bank-notes :  intangible  units  of  valuation,  purchase,  and 
payment  always  result,  even  from  the  delivery  of  coin  in  pur- 
suance of  a  bargain  to  a  seller.  As  the  result  of  the  use  of 
the  coin  by  circulation  is  a  valuation,  purchase  of,  and  payment 
for  units  of  commodities,  and  the  result  of  the  delivery  of  the 
units  of  bank  debt  is  the  same,  it  follows  that  if  one  is  a  com- 
modity the  other  must  be  also,  and  if  one  is  not  a  commodity 
the  other  is  not.  The  difficulty  vanishes  by  fully  admitting 
the  plain  fact,  that  the  value  of  all  money  is  conventional ; 
therefore  no  money  is,  or  by  any  possibility  can  be,  a  cause  or 
end  in  itself ;  it  is  controlled  by  forces  paramount  to  itself. 

What  banks  in  the  United  States  deal  in,  therefore,  to 
speak  with  rigorous  accuracy,  is  the  coin  and  bank-notes 
deposited  by  customers  and  others,  —  coin  and  bank-notes 
at  great  commercial  centres,  and  bank-notes  elsewhere, — 
which  they  are  able  to  keep  in  circulation  by  means  of  loans 
for  the  purposes  of  production,  in  excess  of  the  wants  of 
their  depositors,  and  so  in  excess  of  the  loans  their  depos- 
itors can  make.  The  result  of  this  dealing  by  banks  is,  as  to 
the  debt  they  owe  their  depositors  by  virtue  of  their  having 
deposited,  nothing,  because  they  owe  their  depositors  the 


BANKING  IN  THE  UNITED  STATES. 


171 


same  amount,  whether  they  use  any  of  their  money  or  not, 
subject  to  the  usual  expansion  and  contraction  of  deposits ; 
for  there  is  a  vast  expansion  of  circulation  continually  main- 
tained by  loans,  and  the  necessary  result  of  all  such  bank- 
ing and  such  producing  is  a  commercial  crisis  followed  by  a 
contraction  of  deposits,  unless  some  definite  point  can  be  fixed 
beyond  which  no  loans  can  be  made  by  any  bank ;  and  that 
point  can  be  fixed  only  by  a  regulated  reserve.  Give  the  de- 
positors the  full  benefit  of  the  bank  loans,  by  making  them 
stockholders,  because  they  are  depositors,  and  allow  them  to 
overdraw,  as  in  the  case  supposed,  and  we  have  precisely  the 
same  kind  of  banking  as  now,  although  some  depositors  are 
thus  always  debtors. 

Hence  I  affirm,  without  hesitation,  that  our  deposit  and 
discount  banking  is  only  one  among  other  possible  phases  of 
loaning  money  out  of  a  consolidated  reserve.  Deposit  and 
overdraft  banking  for  the  benefit  of  depositors  as  stockhold- 
ers, where  the  overdrafts  would  cause  the  same  expansion  of 
circulation  as  loans  by  deposit  and  discount  banks,  is,  as  I 
have  shown,  the  same  banking  in  principle.  The  only  es- 
sential difference  is,  that  in  the  actual  case  the  profits  go  to 
stockholders  who  may  or  may  not  be  depositors  ;  in  the  sup- 
posed case,  to  stockholders  who  are  such  only  because  they 
are  depositors.  The  debt  of  borrowers  is  shown  in  one  case 
by  entry  only  ;  in  the  other,  by  bill  or  note.  In  like  man- 
ner, instead  of  allowing  overdrafts  by  depositors,  loans  by 
bill  or  note  might  be  made  them,  the  depositors  being  stock- 
holders and  having  all  the  profits  as  before.  The  real  use 
of  a  reserve  in  a  bank  of  deposit  and  discount  consists  in 
refraining  from  using  all  the  depositors'  money.  What  ap- 
pears in  the  reserve  is  the  amount  of  depositors'  money  which 
banks  have  not  used  at  all,  or,  if  they  have  used,  have  re- 
turned. The  reserve  fixes  itself  in  well  managed  banks  of 
issue  in  a  tolerably  even  average  to  bank-notes  in  circula- 
tion ;  it  will  not  fix  itself  in  a  consolidated  reserve,  because 
there  is  in  the  law  of  numbers  —  the  supply  of  units  in  the 
reserve  being  equal  to  the  loss  on  the  average  —  no  natural 
limit  to  the  expansion  of  circulation,  except  in  the  para- 


172 


POLITICAL  ECONOMY. 


mount  causes  whicli  control  the  circulation  of  those  units  in 
the  reserve  by  bringing  on  a  crisis  in  the  exchanges  of  com- 
modities, and  therefore  of  production,  and  as  a  result,  of 
money. 

THE  BEST  KIND  OF  BANK  TO  CARRY  OUT  THE  PRINCIPLE 
OF  A  REGULATED  RESERVE  IN  THE  UNITED  STATES. 

Inasmuch  as  the  United  States  are  not  likely  to  fall  back 
upon  a  metallic  circulation  of  gold,  or  gold  and  silver,  v^^ith- 
out  banks,  because  they  could  not  do  it  without  disturbing 
the  present  distribution  of  gold,  the  true  question  is.  What 
kind  of  bank  is  best  adapted  to  the  carrying  out  of  the  prin- 
ciple of  a  regulated  reserve  ?  A  supply  of  metal  in  the 
United  States  suitable  for  maintaining  a  circulation  like  that 
of  France  would  be  enormous,  and  would  seriously  disturb 
the  national  ratios  of  metallic  distribution  throughout  the 
commercial  world.  That  distribution  has  been  and  continues 
to  be  greatly  disturbed  by  the  greater  or  less  extension  of 
banks  in  the  countries  supplied.  The  use  of  a  consolidated 
reserve  in  England  economizes,  at  the  enormous  cost  of  un- 
steady prices  and  commercial  revulsions,  a  large  amount  of 
gold,  and  with  the  benefit  of  the  unrivaled  conveniences  of 
banks.  So  is  it  in  the  United  States,  except  that  the  ratio  of 
economy  in  coin  is  much  greater.  Were  the  United  States 
to  resolve  to  give  up  banking,  and  establish  a  metallic  circu- 
lation, then  it  would  be  well,  perhaps,  to  remonetize  silver, 
the  general  government  receiving  assayed  silver  bullion  on 
deposit.  But  such  a  course  is  next  to  impossible.  We  shall 
retain  banks  with  all  their  unrivaled  conveniences,  and,  un- 
less we  perceive  the  necessity  of  regulation,  with  all  their 
dangerous  tendencies.  Hence  it  is  better  to  have  a  system 
of  banks  through  which  the  first  steps  towards  regulation 
can  be  taken  on  a  return  to  convertibility.  That  system  is 
at  hand  in  the  present  national  banks.  The  old  state  banks 
were,  as  banks  of  issue,  taxed  out  of  existence  with  inex- 
cusable rigor,  if  now,  after  having  accomplished  their  ruin, 
the  general  government  does  not  proceed  to  establish  the 
national  banks  upon  a  national  footing  by  consolidating  their 


BANKING  IN  THE  UNITED  STATES. 


173 


metallic  reserves  at  a  commercial  centre,  or  at  commercial 
centres.  In  this  way  the  first  step  towards  regulated  reserve 
can  be  taken.  The  old  fancy  of  regulating  the  issue  of  bank- 
notes issued  from  a  multitude  of  banks,  by  means  of  a  cen- 
tral bank,  however  large  its  capital,  can  never  amount  to  any- 
thing but  a  fancy.  The  Bank  of  the  United  States  never 
accomplished  anything  in  the  way  of  regulating  the  issue  of 
bank-notes.  A  regulated  reserve  is  the  only  possible  reg- 
ulator, as  I  have  fully  demonstrated ;  and  such  a  reserve  has 
never  been  found  with  deposit  and  discount  banks.  The  true 
course,  then,  for  the  United  States,  if  there  should  be  wisdom 
enough  in  Congress  and  the  executive  government  to  discover 
what  is  really  needed,  is,  in  the  first  place,  not  to  lose  the 
monetary  control,  which  has  been  purchased  at  the  cost  of 
very  rigorous  legislation,  which  never  had  the  slightest  justi- 
fication but  in  the  great  importance  of  the  result  to  be  accom- 
plished by  it.  That  result  is  the  "  unification  "  of  the  cur- 
rency. The  unification  can  be  completed  only  by  redemption 
at  a  commercial  centre.  All  the  banks  will  thus,  in  respect 
to  redemptions,  be  converted  mto  one  bank,  while  maintain- 
ing an  independent  existence  for  the  purposes  of  local  busi- 
ness. In  the  second  place.  Congress  ought  immediately  to 
repeal  the  present  law  for  the  collection  of  national  taxes 
now  paid  by  the  banks.  I  have  demonstrated  that  deposits 
in  the  sense  of  a  debt  due  by  banks  over  and  above  the  re- 
serve they  have  to  show  are  in  a  true  sense  so  much  money 
belonging  to  depositors ;  and  to  tax  them  is  to  tax  production 
on  credit,  which  the  banks  have  by  their  loans  permitted  to 
take  place.  The  money  they  lend  comes  out  of  their  reserve  ; 
and  that  reserve  is  the  property  of  depositors  consolidated  in 
one  reserve,  instead  of  being  kept  in  their  own  reserves,  and 
equal  to  all  the  calls  which  depositors  can  ordinarily  make. 
The  bank  profits  result  from  loans,  but  the  averages  of  these 
are  now  small,  because  the  volume  of  production  is  small. 
To  tax  the  banks  on  deposits  and  circulation  is  to  tax  pro- 
duction, now  at  its  lowest  ebb,  and  in  a  state  of  comparative 
exhaustion,  while  allowing  the  state  governments  to  do  the 
same ;  the  downward  scale  of  production,  and  consequently 


174 


POLITICAL  ECONOMY. 


of  prices,  having  now  taken  tlie  place  of  the  upward  one,  in 
obedience  to  a  well  settled  law,  already  explained.  These 
banks  are  also  subject  to  a  much  higher  rate  of  state  tax- 
ation than  those  having  capital  invested  in  private  banking, 
through  higher  rate  of  assessment,  private  banking  capital 
being  on  the  average  assessed  probably  at  less  than  half  its 
value,  that  of  national  banks  at  full  value.  Such  absurd  tax- 
ation as  that  of  the  general  government,  and  such  unjust  dis- 
crimination in  state  taxation,  must  necessarily  tend  to  drive 
many  banks  to  wind  up.  The  true  policy  of  the  general 
government  is  to  take  off  by  legislation  the  taxes  levied  by 
the  general  government,  unless  the  power  of  the  states  to 
levy  taxes  is  taken  away. 

A  fairer  opportunity  than  can  ever  be  expected  to  occur 
again,  exists  now,  to  establish  banking  upon  sound  scientific 
principles,  by  means  of  the  present  national  banks.  The 
difference  in  cost  between  a  nearly  full  metallic  circulation 
like  that  of  France,  where  metal  is  but  slightly  "  economized," 
and  a  circulation  where  metal  is  highly  economized  as  in  the 
United  States,  is  of  little  importance  in  itself,  compared  with 
the  thousands  of  millions  lost  by  what  is  falsely  called  econ- 
omy. It  is  not  in  order  to  save  expense  that  the  United 
States  ought  to  continue  its  deposit  and  discount  banking  but 
because  that  system  having  been  long  established,  and  the 
natural  distribution  of  metal  through  commerce,  so  far 
changed,  it  ought  to  continue  undisturbed,  and  it  can  never 
be  expected  that  the  people  who  have  long  had  the  conven- 
iences afforded  by  such  banks  will  be  willing  to  give  them 
up.  Unless  the  general  government  through  congress,  acting 
for  the  best  interests  of  the  United  States,  soon  relieves  the 
banks  of  national  taxes,  or,  on  the  other  hand  repeals  that 
part  of  the  Bank  Act  which  allows  taxation  of  the  banks  by 
state  governments,  imposing,  should  it  be  repealed,  only  a 
very  moderate  tax  on  behalf  of  the  general  government  in 
lieu  of  the  present  national  taxes,  we  shall  have  state  bank- 
ing again  in  full.  An  amendment  to  the  Constitution  of 
the  United  States  ought  then  to  be  obtained  if  possible, 
subjecting  all  banking  to  the  regulation  and  control  of  con- 


BANKING  IN  THE  UNITED  STATES. 


175 


gress.  The  greatest  dangers  from  banking  lie,  as  I  have 
demonstrated  beyond  reasonable  doubt,  in  deposit  and  dis- 
count banking.  This  may  be  called  banking  by  common  law 
and  common  right.  The  right  to  bank  is  now  unquestioned, 
and  unquestionable,  because  it  is  the  right  only  to  loan 
a  substitute  which,  as  the  commercial  world  and  bankers 
and  writers  say,  exists,  in  consequence  of  the  banking  (bank 
credit),  and  not  to  make  or  to  issue  additional  money  like 
bank-notes.  The  universal  opinion  seems  to  be,  that  banks 
deal  only  in  what  the  public  owe  them  and  they  owe  to  the 
public  and  to  each  other.  If  such  be  the  general  opinion, 
including  writers  on  the  subject  of  money,  what  is  there,  it 
will  be  asked,  to  regulate,  unless  an  attempt  be  made  to  reg- 
ulate trade  itself  ?  The  question  has  abundant  common  sense 
in  it,  because  it  is  backed  by  common  opinion.  The  diffi- 
culty comes  from  not  comprehending  the  difference  between 
money  not  circulated  and  the  circulation  of  money.  If  pro- 
duction for  the  purposes  of  sale  were  stopped,  there  would  then 
be  no  such  thing  as  money ;  there  could  be  no  conventional 
value,  because  there  would  cease  to  be  any  real  value.  Hence 
the  use  of  money,  which  is  the  circulation  of  money,  is  in- 
separable from  money,  and  for  all  practical  purposes  is 
money  itself.  Money,  then,  in  its  practical  sense,  is  the  use  of 
a  conventional  process  to  pay  for  labor,  commodities,  and  cap- 
ital, and  thus  distribute  them.  They  are  thus  exchanged,  not 
directly,  but  indirectly,  and  very  effectually.  The  payment 
of  money,  then,  or  in  other  words  circulation,  to  pay  for  labor, 
raw  material,  and  other  commodities,  and  occasionally  capital, 
is  the  object  of  bank  loans.  The  process  of  loaning  money 
by  banks,  to  enable  borrowers  to  make  such  purchases,  seems 
to  the  banker,  the  borrower,  and  the  scientist  to  be  only  the 
loan  of  a  debt  against  itself,  or  some  other  bank,  which  soon,  by 
assignment  or  redemption,  effected  by  a  check,  appears  in 
the  shape  of  debt  thus  assigned  or  redeemed,  and  due  from 
the  same  or  another  bank  ;  the  whole  resulting  in  an  equal 
expansion  or  an  equal  contraction  of  bank  debt,  and  borrow- 
er's debt.  This  is  all  illusory,  as  I  have  clearly  demonstrated. 
Debt  is  not  what  is  dealt  in,  for  it  is  the  result  and  effect  pro- 


176 


POLITICAL  ECONOMY. 


duced  by  circulation  out  of  a  consolidated  reserve.  If  with  a 
deposit  and  discount  banking  reserve  of  one  hundred  millions, 
one  half  metal  and  one  half  bank-notes,  more  circulation  and 
therefore  more  production  takes  place  within  the  same  period 
than  with  one  hundred  and  fifty  millions  of  bank-notes  and  a 
reserve  of  fifty  millions  metal  with  banks  of  issue  only,  while 
production  and  prices,  under  deposit  and  discount,  are  in  the 
rising  scale  within  equal  periods,  then  it  is  certain  that  the 
material  question  in  what  is  called  regulating  a  currency, 
must  be,  how  to  regulate  the  loans  that  can  be  made  within 
the  period.  The  illusion  arises  from  not  comprehending  that 
what  really  circulates  is  money  in  the  reserve;  that  nothing 
else  can  by  possibility  circulate,  and  that  everything  which 
pays  for  labor  and  commodities  is  money ;  that  a  bank  can 
only  deal  in  what  it  receives ;  that  units  of  bank  debt,  granting 
that  they  were  actually  used  as  supposed,  —  and  they  might 
be  if  there  were  no  metal  or  notes,  —  would  be  money  pre- 
cisely to  the  same  extent  as  bank-notes,  or  even  the  coin  in 
the  reserve  itself;  and  that  all  this  excess  and  surplus  of  cir- 
culation, no  matter  whether  we  suppose  it  to  be  effected  by 
units  of  coin,  bank-notes,  or  bank  debt  by  book,  points  with 
unfailing  accuracy  to  an  equivalent  amount  of  production  in 
excess  of  consumption,  and  consumption  in  excess  of  produc- 
tion ;  perhaps  nine  tenths  of  it  the  former  and  one  tenth  the 
latter.  If  a  government  or  bank,  in  the  absence  of  banks  of 
deposit  and  discount,  issues  one  thousand  millions  of  irre- 
deemable notes,  paid  out  chiefly  for  hire  of  soldiers,  their 
arms,  equipments,  and  stores,  what  is  rendered  in  return  is 
military  service,  not  of  an  ordinary,  but  an  extraordinary 
kind  ;  and  the  money  when  distributed  through  the  commu- 
nity at  large  is  therefore  in  excess  of  ordinary  circulation. 
Excess  of  circulation  above  average,  after  this  distribution, 
may  or  may  not  be  the  result,  accordingly  as  an  equal  volume 
of  metal  and  bank-notes  is  or  is  not  retired ;  and  so  far  it 
may  or  it  may  not  stimulate  production  through  rising  prices 
only,  without  the  aid  of  hank  loans.  The  whole  question  then 
resolves  itself  into  harmony  of  production  and  consumption. 
Taxes  and  tariffs  are  sometimes  said  to  fall  chiefly  upon  land, 


BANKING  IN  THE  UNITED  STATES.  177 

first  and  last,  but  the  assertion  is  true  in  this  sense  only : 
The  consumers  of  products  bought  with  money  raised  by  tar- 
iffs and  taxes  must  unavoidably  consume  more  in  proportion 
of  the  absolute  than  of  relative  necessaries,  when  the  produc- 
tion of  the  latter  is  in  the  rising  scale,  and  economy  compels 
them  to  this  course  where  that  production  is  in  the  falling 
scale  ;  all  which  is  true  of  the  community  at  large.  Hence 
it  follows  that  they  buy  most  in  proportion  from  the  pro- 
ducers of  absolute,  and  least  from  the  producers  of  relative, 
necessaries.  Again,  taxation  is  sometimes  said  to  fall  heav- 
iest on  manufacturers.  This  is  true  in  no  other  sense  than 
that  already  stated.  All  unproductive  consumption,  or  con- 
sumption out  of  the  ordinary  course,  like  that  of  the  con- 
sumers of  products  bought  with  money  raised  by  taxation, 
disposes  of  a  larger  proportion,  and  therefore  finds  a  market 
for  more  of  absolute  than  of  relative  necessaries,  as  happens 
with  the  majority  of  consumers.  The  true  policy  of  the  gen- 
eral government  is  to  require  the  national  banks  to  keep  a 
consolidated  reserve  of  at  least  twenty  per  cent,  of  metal  at 
one  or  more  commercial  centres  on  their  total  debt,  as  well 
that  due  depositors  as  note-holders.  In  the  case  of  private 
banks  the  rule  would  apply  only  to  deposits.  The  general 
government  ought  to  keep  in  a  Bureau  of  Redemption  the 
coin  deposited  for  redemption  of  notes,  and  commercial  banks 
ought  to  keep  at  such  centre  or  centres  the  deposit  reserve, 
or  a  definite  portion  of  it.  To  make  sure,  or  rather  to 
make  surer,  the  maintenance  of  the  latter  reserve,  it  ought 
to  be  kept  in  a  single  consolidated  reserve  or  reserves,  under 
the  control  of  the  clearing  house  of  the  commercial  centre, 
and  subject  to  regular  inspection  by  oflB.cers  of  high  grade,  or 
upon  an  essentially  similar  plan.  A  plan  for  carrying  out 
such  a  principle  is  given  in  another  chapter. 

GOVERNMENT  ISSUES  OF  NOTES. 

In  answer  to  those  who  propose  to  leave  the  issue  of  cir- 
culating notes  to  the  general  government,  it  is  enough  to  say 
.that  the  general  government  can  never  perform  the  proper 
functions  either  of  a  bank  of  issue  or  of  deposit  and  discount. 

12 


178 


POLITICAL  ECONOMY. 


The  proper  business  of  all  banks  is  to  loan  to  producers  of 
some  kind,  and  producers  are  scattered  over  the  whole  coun- 
try. By  the  demonstrations  in  this  and  other  chapters  it 
appears  that  the  chief  benefit  of  a  metallic  reserve  is  found 
in  the  maintenance  of  a  fixed  minimum  ratio  of  reserve  to 
liabilities  in  harmony  with  commerce.  This  cannot  be  kept 
by  the  general  government  unless  it  makes  a  fixed  and  lim- 
ited issue  or  unless  it  turns  banker.  The  proposition,  there- 
fore, resolves  itself  practically  into  converting  the  general  gov- 
ernment into  a  huge  bank,  unless  the  issues  are  to  be  made 
or  rather  allowed  to  remain  outstanding  to  a  fixed  amount, 
bringing  metal  into  circulation  for  the  remainder.  There 
would  be  no  harm  in  the  government  maintaining  a  fixed 
issue  of  convertible  paper,  equal  to  or  even  in  excess  of  the 
average  of  its  annual  holdings  of  metal :  but  it  cannot  go 
into  banking,  for  it  is  impossible  for  any  bank  or  banks  to 
issue  notes  unless  they  are  issued  on  loans  to  be  employed  in 
production,  or  in  consumption  with  the  prospect  of  balancing 
it  by  production,  receiving  notes  or  met.al  in  return  for  pay- 
ment of  loans  as  fast  as  the  products  are  sold  for  consump- 
tion. No  bank  makes  any  other  loans,  unless  it  cheats  its 
stockholders,  or  is  cheated  so  far  by  its  customers  or  loses  by 
bankruptcy.  An  occasional  or  a  very  limited  issue  by  gov- 
ernment, like  treasury-notes  in  the  United  States  before  the 
late  civil  war,  the  maintenance  of  a  fixed  portion  of  the 
present  issue  in  circulation,  exchequer  bills  in  England,  and 
bank-notes  issued  upon  government  debt  due  the  Bank  of 
England,  is  unobjectionable.  These  issues  were  small  in  the 
United  States  before  the  late  civil  war,  and  are  so  compara- 
tively small  in  England  that  for  all  practical  purposes  the 
circulation  of  England  may  be  called  metallic.  In  no  other 
way  than  this  ought  the  United  States  to  issue  more  treas- 
ury-notes, and  only  for  the  purpose  of  supplementing  the 
loss  of  gold.  Deposit  and  discount  banking,  as  we  have 
seen  by  the  foregoing  demonstrations  made  in  a  variety  of 
forms,  consists  in  receiving  money,  placed  to  depositors'  credit, 
and  paying  out  money  upon  their  orders,  meantime  loaning,  ^ 
say  four  fifths  more  or  less  of  it ;  the  money  so  loaned  going 


BANKING  IN  THE  UNITED  STATES. 


179 


partly  into  circulation  outside  of  deposit,  and  some  of  it  cir- 
culating into  and  out  of  deposit.  These  loans  can  only  be 
made  by  bankers,  but  government  cannot  possibly  discharge 
the  functions  of  a  banker  without  having  agencies  in  almost 
every  village.  This,  therefore,  cannot  be  the  kind  of  bank- 
ing expected  of  the  general  government. 

But  the  general  government  might,  with  quite  as  much 
success,  undertake  deposit  and  discount  banking  as  note-issue 
banking :  a  loan  of  bank-notes  by  a  bank  of  issue  is  made 
for  the  same  purposes  as  a  loan  by  a  bank  of  deposit  and 
discount.  An  important  difference  between  the  two  kinds 
of  banks  lies  in  the  fact  that  the  bank  of  deposit  and  dis- 
count does  not  own  its  reserve,  the  bank  of  issue  does  ;  the 
debt  over  and  above  reserve  the  former  owes  its  customers  is 
the  result  of  loaning  their  money  ;  the  debt  due  note-holders 
by  a  bank  of  issue  is  the  result  of  issuing  its  notes,  but  the 
reserve  for  redemption  of  notes  belongs  to  the  bank.  While 
there  is  no  practical  limit  to  the  loans  of  the  bank  of  deposit 
and  discount  which  keeps  no  fixed  minimum  ratio  of  reserve 
to  its  total  deposit  debt,  a  well  managed  bank  of  issue,  in  the 
absence  of  all  banks  of  deposit  and  discount,  cannot  avoid 
keeping  a  minimum  ratio  of  reserve  to  outstanding  notes, 
because  it  has  to  redeem  its  notes  out  of  a  reserve  which 
varies  only  with  the  metal  of  the  commercial  world  in  the 
shape  of  coin.  The  commercial  world's  coin  varies  only 
with  commerce  and  not  with  production,  and  so  does  the 
reserve  of  the  bank  of  issue. 

As  the  general  government,  therefore,  can  do  no  banking 
of  any  kind,  the  only  course  left  is  to  put  the  national  banks 
in  the  way  of  doing  the  most  of  the  banking  business  of  the 
country  by  fair  and  judicious  legislation.  It  is  of  vastly 
more  importance  to  the  country  than  the  banks  that  this 
policy  be  pursued.  The  general  government  can  no  more 
furnish  banking  facilities,  either  in  the  way  of  bank  loans  or 
loans  of  notes,  than  it  can  go  into  the  manufacture  of  cloth. 
The  business  must  be  done  by  banks :  banks  take  the  risks 
of  producers  of  all  sorts  to  whom  they  lend,  except  as  to  the 
rate  of  profits  that  is  fixed  by  discount.    In  other  respects 


180 


POLITICAL  ECONOMY. 


they  take  the  risks  of  trade.  If  the  national  banks,  through 
popular  prejudice  or  ignorance,  are  forced  for  the  most  part 
to  liquidate  and  put  their  capital  into  private  banking,  or 
banking  under  state  organizations,  the  immediate  gain  will 
be  theirs ;  the  ultimate  loss  that  of  the  people  at  large. 

A  well  regulated  system  of  banking,  which  can  now  be  had 
by  justice  and  equity  towards  the  banks,  will  be  worth  more 
to  the  United  States  than  a  thousand  times  all  the  taxes  that 
will  ever  be  paid  by  them,  whether  to  the  States  or  to  the 
general  government. 

But  wherein  lies  the  essential  difference  between  banking 
in  England  and  the  United  States?  Bank-notes  without 
any  fixed  ratio  of  metallic  reserve  to  circulating  notes  are  in 
use  in  the  United  States  when  convertibility  exists,  and  will 
probably  be  the  currency  in  the  United  States  after  the 
return  to  convertibility.  If  the  national  bank-notes  are 
made  redeemable  at  commercial  centres  in  coin,  they  would 
—  were  there  no  deposit  and  discount  banking  —  be  not  only 
redeemable  in  gold,  but  actually  redeemed  in  gold,  because 
they  could  not  be  deposited.  But  as  there  is  and  will  be 
deposit  and  discount  banking  everywhere  they  will  be 
mostly  redeemed  by  exchanging  them  for  a  deposit  in  com- 
mercial banks,  and  these  banks  will  mutually  redeem  each 
other's  notes,  as  they  always  have  done  in  the  United  States, 
by  receiving  them  into  deposit,  and,  sooner  or  later,  giving 
checks  on  commercial  centres  in  exchange  for  the  deposit. 
These  checks  are  paid  in  bank  credit  which  is  a  substitute 
for  the  first.  But  no  gold  is  actually  paid  out  in  either  case  : 
the  first  deposit  gives  a  right  to  draw  gold  or  bank-notes  — 
practically  bank-notes  —  from  the  receiving  country  bank,  and 
the  second  gives  a  recognized  right  to  draw  gold  for  the  most 
part,  there  being  in  most  banks  gold  enough  to  cover  all 
payments.  It  follows  that  bank-notes  in  the  United  States, 
even  under  the  most  perfect  convertibility  possible  under 
deposit  and  discount  banking,  are  not  kept  in  any  definite 
ratio  to  the  commercial  world's  gold,  because  they  are  not  re- 
deemed in  it ;  they  are  redeemed  at  best  out  of  a  fluctuating 
metallic  reserve  whose  volume  is  controlled  by  bank  credits, 


BAJ^KING  IN  THE  UNITED  STATES. 


181 


and  hence  by  production  :  the  variation  in  the  reserve  is  di- 
rected and  controlled  by  the  paramount  force  of  production 
through  bank  loans  instead  of  the  actual  exchanges  in  a  con- 
sumer's market. 

Wherein  will  this  last  banking  differ  substantially  from 
English  banking  ?  The  difference  will  be  substantially  the 
same  as  between  English  banking  before  1844  and  English 
banking  since  1844.  This  difference  consists  in  the  fact 
that  there  was  in  England,  before  1844,  a  double  variation : 
first,  the  variation  in  the  circulation  of  metallic  banking  re- 
serve, and,  secondly,  in  that  of  metallic  bank-note  redemp- 
tion reserve,  from  the  circulation  of  the  commercial  world's 
gold,  because  the  latter  (in  France,  for  instance)  circulates 
only  in  exchange  for  commodities  in  a  consumer's  market, 
which  is  the  market  of  true  commerce,  and  in  exchange  for 
labor,  only  to  supply  that  market ;  while  the  former  circu- 
lated in  reserve,  in  exchange  for  labor  to  supply  production 
indefinitely,  and  in  exchange  for  commodities  (largely  abso- 
lute necessaries  to  feed  and  support  that  labor  whose  product 
found  no  market),  thus  expanding  circulation  through  loan 
largely  in  excess  of  that  contraction  of  circulation  which 
comes  by  payment  of  loans.  Both  these  variable  reserves 
were  made  more  variable  in  respect  to  the  extent  or  volume 
of  maximum  and  minimum  prices  (but  caused  no  greater  vol- 
ume of  production  to  take  place)  than  would  have  been  the 
case  had  the  currency  been  entirely  metallic  before,  as  it  has 
substantially  become  since  1844.  The  range  of  variation  in 
nominal  prices  was  therefore  relatively  greater  before  than  it 
has  been  since  1844  :  the  nominal  average  price  was  greater 
before  1844  ;  the  real  price,  relatively  speaking,  was  the 
same. 

This  accounts  for  the  relatively  higher  prices  in  the  United 
States,  since  1844,  than  in  England.  What  is  the  effect  of 
these  relatively  higher  prices  upon  producers,  especially  those 
who  are  protected  ?  If  the  whole  commercial  world  had  no 
currency  but  gold  and  silver  distributed  everywhere  by  com- 
merce, and  no  banks,  and  no  debt  of  any  kind  whatever,  to 
double  the  total  of  silver  and  gold  in  each  holder's  hands  by 


182 


POLITICAL  ECONOMY. 


increasing  every  coin  to  two  coins  of  like  weight  with  the 
first  would  bring  neither  loss  nor  gain  to  anybody.  The  pur- 
chasing power  or  value  in  exchange  of  the  two  coins  would 
be  the  same  as  that  of  one  of  them  before,  and  total  pur- 
chasing power  would  continue  the  same.  In  like  manner, 
if  the  number  of  coins  were  reduced  one  half,  the  purchasing 
power  of  the  remaining  half  would  be  the  same  as  that  of 
the  whole  before.  As  total  purchasing  power  is  exactly  the 
same  under  all  changes,  all  variations  in  mass  of  the  two 
metals  existing  as  coin  (whether  the  same  or  different  in 
the  two  metals),  relatively  to  the  absolute  and  unvarying 
total  of  purchasing  power,  can  make  no  possible  difference. 
The  more  of  either  metal  going  into  plate  and  other  uses 
than  money,  so  much  the  less  in  weight  goes  into  coin,  and 
so  much  greater  the  relative  purchasing  power;  the  less 
going  into  plate  and  other  uses  than  money,  so  much  less 
the  relative  purchasing  power  of  that  part  going  into  coin. 
Gold  and  silver  being  still  supposed  money  everywhere,  pur- 
chasing power,  which  is  always  one  and  the  same  invariable 
total,  would  be  by  this  action  and  reaction  mutually  divided 
between  them.  A  relative  increase  in  gold  or  a  relative  in- 
crease in  silver,  if  suddenly  occurring,  would  not  affect  the 
commercial  world,  because  total  purchasing  power  would  re- 
main the  same.  All  this  comes  from  money  being  a  series 
of  units  of  value,  or  a  conventional  commodity.  A  gradual 
change  —  and  there  is  in  fact  no  other  —  can  therefore  cer- 
tainly do  no  injury.  Hence  it  might  be  supposed  any  arti- 
ficial increase,  through  banking,  in  the  volume,  which  means 
the  total  number  of  units  of  the  conventional  commodity, 
money,  circulated,  as  compared  with  units  of  commodities 
in  the  United  States,  afterwards  shipped  and  exchanged 
through  units  of  money  in  England  for  English  goods,  in 
Liverpool,  Manchester,  or  elsewhere  in  England,  and  after- 
wards imported  into  the  United  States,  and  paying  duty, 
would  not  make  the  imported  goods  necessarily  cheaper  rela- 
tively in  the  United  States,  reckoning  in  American  currency, 
than  American  goods  of  the  same  sort.  But  the  problem 
has  some  very  complex  elements  through  banking.  The 


BANKING  m  THE  UNITED  STATES.  183 


American  currency  is  convertible  into  and  therefore  on  a  par 
with  gold,  while  British  currency  is  substantially  gold  itself. 
British  gold  is  depreciated  relatively  below  the  commercial 
world's  gold  in  France,  where  there  is  but  little  deposit  and 
discount  banking,  because  its  circulation  has  been,  through 
that  kind  of  banking,  without  any  regulated  reserve  in  Great 
Britain,  made  to  vary,  not  as  the  commercial  world's  gold  va- 
ries in  France,  according  to  actual  exchanges  in  a  consumer's 
market,  and  production  to  supply  that  market,  but  accord- 
ing to  the  mercantile  market  for  goods  in  overstock  and  the 
production  which  supplies  that  market,  while  in  the  United 
States  gold  is  depreciated  further  by  a  bank-note  currency 
convertible  only  into  gold  in  a  reserve  which  varies  in  a  sim- 
ilar manner.  The  latter  variation  in  the  United  States  is 
largely  increased  by  the  expansion  of  bank-note  circulation,* — 
an  expansion  which  can  be  checked,  but  only  approximately, 
by  convertibility  into  gold  in  a  bank-note-redemption  reserve, 
supplied  by  the  commercial  world's  gold,  freely  circulating 
outside.  This  depreciation  in  gold  in  the  United  States,  as 
compared  with  gold  in  England,  and  still  more  in  France, 
operates  to  make  metal  in  coin  as  well  as  bullion  a  profita- 
ble article  for  export,  and  it  also  follows  that  the  articles 
exported,  which  being  valued  in  the  foreign  market  (wheat, 
for  instance)  lose,  like  gold  exported,  the  benefit  of  the  ex- 
panded home  circulation  before  being  valued  abroad.  This 
depreciation  of  the  articles  exported  is  counterbalanced  to 
the  producer  in  the  price  of  those  which  are  not  exported, 
and  thus  the  cost  of  living  is  enhanced  to  the  American  pro- 
ducer to  the  precise  extent  by  which  it  is  cheapened  through 
the  wheat  and  other  articles  exported  to  the  foreign  pro- 
ducer. In  this  way  the  American  producer  loses  the  ben- 
efit of  much  of  the  protection  which  was  intended  for  him, 
through  the  immensely  complex  results  of  deposit  and  dis- 
count loans.  The  protection  of  a  steady  currency  would  be 
worth  more  to  him  than  such  protection  as  he  gets. 

If  banking  were  generally  established  in  France  within  one 
year  after  resumption  of  payments  by  the  Bank  of  France,  — 
assuming  that  banking  could  be  generally  established  within 


184 


POLITICAL  ECONOMY. 


SO  short  a  period,  —  seventy -five  per  cent,  of  the  gold  and  sil- 
ver deposited  could  be  sent  for  loan  to  England  or  the  United 
States,  or  retained  and  loaned  at  home.  In  either  case  the 
French  banks  would  convert  seventy-five  per  cent,  of  their 
deposits  into  loans.  These  loans  would  there  represent  so 
much  money  invested  in  additional  production,  whether  they 
were  made  to  merchants  or  not,  because  they  would  furnish 
the  means  of  paying  labor  and  capital  to  produce  to  that  ex- 
tent where  additional  production  was  possible  by  the  aid  of 
the  loans.  But  it  would  be  banking  reserve  all  the  time 
that  would  make  the  payments  to  depositors  as  often  as  they 
demanded  their  money,  because  the  same  reserve  would  be 
continually  replenished  through  deposits  by  those  who  had 
received  the  money  which  had  thus  been  paid  out.  The 
reserve  being  now  by  supposition  twenty-five  per  cent.,  the 
banks  could  continue  to  loan  until  it  reached  twenty,  eight- 
een, and  at  last  sixteen  per  cent,  or  less.  Meanwhile  the 
daily  difference  between  the  outgoing  current  of  payments 
to  depositors  and  the  incoming  current  of  deposit  would 
be  small,  although  the  foundations  of  a  banking  crisis  were 
being  laid.  If  "  clearing "  were  in  use,  appearances  would 
indicate  that  the  banks  were  dealing  in  their  own  debt  due 
depositors,  but  the  appearance  would  be  deceptive.  The 
banks  would  be  dealing  all  the  time  in  the  reserve,  be- 
cause, as  demonstrated  in  former  chapters,  the  reserve  is, 
in  its  character  of  a  consolidated  fund,  capable  of  making 
the  same  number  and  the  same  total  amount  of  payments 
which  the  total  of  deposits  could  do  in  the  shape  of  either 
metal  or  notes  in  the  pockets,  tills,  and  safes  of  depos- 
itors. Banks  of  deposit  and  discount  do  not  deal  in  their 
own  debt ;  it  is  impossible  for  them  to  do  so  without  be- 
coming banks  of  issue.  It  had  been  well  for  the  United 
States  were  it  true  that  banks  of  deposit  and  discount  deal 
in  their  own  debt,  for  in  that  case  discounts  would  have 
been  always  limited  by  banking  reserve,  instead  of  the  lat- 
ter being  limited  by  the  former.  All  money  being  but  a 
series  of  units,  limited  in  circulation  either,  on  the  one  hand, 
by  the  commerce  of  a  buyer's  and  seller's  market,  as  with  a 


BANKING  IN  THE  UNITED  STATES. 


185 


metallic  or  metallic  and  bank-note  currency,  without  banks 
of  deposit  and  discount,  or,  on  the  other  hand,  by  a  seller's 
market,  as  with  banks  of  deposit  and  discount  which  have 
no  limits  but  a  banking  crisis  for  loans,  the  use  of  money  is 
itself  but  a  kind  of  conventional  credit.  Because  all  money, 
whether  metal  or  paper,  is  such  a  series  of  units,  the  reserve 
has  the  same  efficiency  in  bank  as  the  total  of  deposits  could 
have  in  the  possession  of  depositors.  The  reserve  having 
such  efficiency,  to  invoke  the  aid  of  bank  debt  would  be 
superfluous,  even  if  it  were  possible.  Such  is  the  difference 
between  the  monetary  system  of  France,  without  banks,  and 
the  monetary  systems  of  Great  Britain  and  the  United  States, 
with  banks.  Representing  by  a  circle  the  production  of  ab- 
solute, and  by  a  polygon  inscribed  within  it  the  production  of 
relative  necessaries  for  each  country,  the  production  of  rela- 
tive necessaries  in  France  would  require  a  polygon  of  many 

sides  touching  the  circle  at  short 
distances,  while  that  kind  of  pro- 
duction in  Great  Britain  would 
require  one  touching  the  circle  at 


France. 

Inscribed  polygon  of  40  sides  by 
supposition 


Great  Britain. 


United  States. 


Inscribed  polygon  of  8   Polygon  now  reduced  to 
sides.  inscribed  square. 


a  comparatively  small,  and  in  the  United  States  still  smaller, 
number  of  points. 

To  bring  the  present  monetary  system  of  Great  Britain 
as  near  as  possible  to  that  of  France,  a  fixed  ratio  of  reserve 
to  bank  debt  in  the  shape  of  commercial  deposits  is  essen- 
tial, whether  it  be  fixed  and  afterwards  maintained  by  a  uni- 
versal banker's  league  or  by  law,  or  both.  For  this  purpose 
the  functions  of  commercial  and  savings  banks  ought  to  be 
separated,  for  the  deposits  and  redeposits  of  commercial  banks 
are  themselves  a  large  portion  of  the  monetary  exchanges  of 


186 


POLITICAL  ECONOMY. 


commerce.  They  are  the  payments  made  by  consumers  to 
retailers,  by  retailers  to  wholesalers,  and  occasionally  by 
wholesalers  to  each  other.  To  regulate  bank  loans  by  re- 
serve is  to  regulate  them  by  deposits  of  this  character,  that 
is  to  say,  by  the  market  of  consumers  who  have  exchanged 
products,  and  not  the  market  of  producers  only.  The  de- 
posits of  savings  banks  are  not,  except  to  a  slight  extent,  of 
this  character.  The  present  volume  of  paper  and  metal  in 
Great  Britain  is  probably  sufficient  or  nearly  sufficient,  under 
a  regulated  banking  reserve  fixed  at  a  ratio  of  twenty  per 
cent. ;  and  in  case  of  deficiency,  fifteen  millions  of  pounds  of 
additional  paper  or  metal  would  be  ample.  But^  the  great 
difficulty  to  be  surmounted  would  be  to  maintain  the  system 
of  a  regulated  reserve,  either  in  Great  Britain  or  the  United 
States.  In  both  countries  it  ought  to  be  metallic,  because, 
as  already  shown  in  this  chapter,  the  redemption  of  notes  in 
coin  in  the  United  States  out  of  the  commercial  world's  stock 
moving  into  and  out  of  reserve,  and  circulating  freely  with 
bank-notes  outside  of  banks,  —  a  condition  essential  to  metal- 
lic limitation  of  their  volume,  —  is  arrested  by  the  facility  of 
depositing  with  the  nearest  banker.  The  deposit  of  the  notes 
is  itself  a  redemption  of  the  notes,  although  not  in  the  com- 
mercial world's  coin,  for  the  banker  who  receives  the  notes 
becomes  liable  for  the  amount  deposited,  and  thus  each  bank 
virtually  redeems  for  all  other  banks.  A  weak  bank,  like 
the  Scotch  Bank  of  Ayr  in  Adam  Smith's  time,  when  there 
were  none  but  banks  of  issue,  immediately  demonstrated  its 
weakness  by  purchases  of  metal  at  a  large  premium  in  Lon- 
don in  order  to  maintain  the  redemption  of  its  notes.  It 
was  compelled  to  stand  by  itself ;  and  when  it  could  stand 
no  longer,  because  its  capital  was  exhausted,  it  failed,  in- 
volving no  other  banks  in  its  ruin.  But  deposit  and  dis- 
count banks,  whether  they  have  the  function  of  issuing  notes 
or  not,  perform  the  first  act  of  redemption  for  all  banks  of 
issue  in  the  manner  stated,  by  receiving  their  notes  on  de- 
posit, and  complete  the  redemption  by  checks,  drafts,  and 
bills,  upon  commercial  centres,  in  discharge  of  the  liability 
thus  assumed.    Nor  are  these  checks,  drafts,  and  bills  paid 


BANKING  IN  THE  UNITED  STATES. 


187 


out  of  the  commercial  world's  stock  of  metal,  but  out  of  the 
metal  in  a  fluctuating  reserve.  In  the  absence  of  all  deposit 
and  discount  banking,  on  the  other  hand,  the  notes  would  be 
paid,  as  in  the  case  of  the  Bank  of  Ayr,  out  of  the  commer- 
cial world's  stock  at  large,  and  overissues  would  soon  bank- 
rupt a  bank.  The  metallic  limitation  of  convertible  bank- 
notes, in  the  absence  of  all  deposit  and  discount  banking,  is 
thus  approximately  perfect,  but  imperfect  where  deposit  and 
discount  banking  prevails.  If  regulation  of  reserve  in  de- 
posit and  discount  banks  is  impossible,  the  only  method  of 
maintaining  a  metallic  limitation  of  bank  debt  in  any  form, 
is,  therefore,  the  suppression  of  all  but  note-issue  banking. 
Adam  Smith's  assertion  that  bank-notes,  always  redeemable 
in  gold  and  silver,  could  never  exceed  in  volume  the  metal 
whose  place  they  took,  has  been  accepted  as  true  by  most 
writers,  although  he  never  proved  its  truth.  It  is,  however, 
approximately  true,  because  these  metals  are  the  money  of 
the  commercial  world,  and  the  addition  in  volume  to  the 
total  of  that  money,  caused  by  the  Scotch  bank-notes  of 
Smith's  time,  could  scarcely  have  amounted  to  the  half  of 
one  per  cent.  But  even  with  this  qualification  he  failed  to 
prove  his  assertion.  He  brought  forward  the  case  of  the 
Bank  of  Ayr  to  prove  that  overissues  by  any  bank  would 
in  time  bring  on  bankruptcy,  but  did  not  define  overissues, 
nor  point  out  how  they  were  to  be  avoided.  I  have  shown 
what  overissues  are,  and  why  they  cannot,  on  the  whole,  be 
carried  very  far  by  banks  of  issue  only.  But  the  writers 
since  Smith  take  his  assertions,  which  were  made  in  refer- 
ence to  the  banks  of  issue  of  his  time,  to  be  still  applicable 
to  the  banks  of  our  day,  which,  so  far  as  they  are  banks  of 
issue,  have  that  function  in  addition  to  those  of  deposit  and 
discount.  While,  however,  there  can  be  no  excess  of  re- 
deemable bank-notes  for  the  purpose  of  buying  labor,  even 
under  deposit  and  discount  banking,  there  may  be  an  excess 
for  other  purposes.  Calling  the  circle  in  the  foregoing  dia- 
grams the  line  of  production  of  absolute,  the  inscribed  poly- 
gon in  the  case  of  France  may  be  called  the  series  of  lines 
representing  the  production  of  relative  necessaries.  The 


188 


POLITICAL  ECONOMY. 


movement  of  the  loans  made  to  be  applied  towards  the  latter 
kind  of  production  may  also  be  represented  by  the  same 
polygon  in  the  case  of  France.  The  bank-note  circulation 
of  France  to-day,  and  of  Scotland,  in  Smith's  time,  may  also 
be  represented  approximately  by  that  polygon,  which,  touch- 
ing the  circle  of  absolute  necessaries  at  short  intervals,  regu- 
lates all  production,  and  consequently  the  distribution  of  all 
commodities  and  capital,  and  the  circulation  of  all  money,  at 
equally  short  intervals,  by  that  circle.  This  circle  represents 
the  production  of  absolute  necessaries  which  never  can  be  in 
excess  ;  the  inscribed  polygon  that  of  relative  necessaries 
which  may  be  in  excess.  The  aim  of  all  currency  reforms 
should  be  to  increase  the  number  of  the  sides  of  the  inscribed 
polygon  so  as  to  make  it  touch  the  containing  circle  as  often 
as  possible.  All  practical  political  economy,  not  only  for 
Great  Britain,  but  all  the  members  of  what  is  called  the 
Anglo-Saxon  family,  lies  in  this  direction.  The  same  kind 
of  banking  prevails  in  Great  Britain,  the  United  States,  the 
Dominion  of  Canada,  and  Australia.  The  great  principles 
of  social  science  are,  in  all  its  branches,  the  same  for  all  coun- 
tries, but  there  seems  to  be  an  exuberance  of  productive  en- 
ergy in  the  members  of  this  great  family.  What  is  needed 
for  all  of  them  is  to  regulate  that  energy  by  bringing  the 
application  of  it  in  the  production  of  relative  into  harmony 
with  that  of  absolute  necessaries,  so  that  there  shall  be  no  loss 
through  misapplication  of  productive  power.  Strange  and 
new  as  it  may  sound,  the  only  point  where  anything  can  be 
done  towards  this  end  is  in  metallic  banking  reserve. 

Such  energy  of  production  needs  not  the  stimulus  of  un- 
restricted bank  loans,  even  supposing  that  stimulus  to  have 
the  effect  of  quickening  into  life,  and  not  of  quickening,  only 
to  kill  afterwards.  Their  laborers  need  steady  employment 
and  steady  wages,  and  these  they  can  have  only  by  steady 
production.  Prior  to  1873,  when  railroad  building  was  at  its 
height  in  the  United  States,  all  the  iron  workers  of  Great 
Britain  and  the  United  States  were  needed  to  supply  rails 
at  high  prices,  but  now  those  of  the  United  States  can  more 
than  supply  the  demand  at  low  prices,  and  so  of  other  prod- 


BANKING  IN  THE  UNITED  STATES. 


189 


ucts.  By  waiting  a  few  years  longer,  the  same  amount  of 
iron  would  have  found  a  market,  and  the  same  number  of 
raih'oads  would  have  been  built  at  average  instead  of  high 
prices.  The  want  of  the  time  for  all  nations,  and  especially 
for  Great  Britain  and  the  United  States,  is  to  bring  produc- 
tion on  credit,  and  thereby  employment  and  wages,  towards 
the  line  of  production  of  absolute  necessaries ;  to  change  the 
inscribed  square  of  the  United  States  and  the  eight-sided 
polygon  of  Great  Britain,  to  a  polygon  of  many  sides,  touch- 
ing the  circle  so  often  that  for  all  practical  purposes  the  two 
might  be  regarded  as  one.  The  true  nature  of  money  and  of 
banking  are  not  yet  understood,  and  time  alone,  —  probably 
enough  to  cover  another  cycle  of  progressive  expansion  and 
contraction,  of  production  and  circulation,  —  after  sufficient 
examination,  will  bring  regulation.  The  first  step  is  to  learn 
that  paper  money,  if  the  holder  were  properly  secured  be- 
yond reasonable  doubt,  would  answer  all  the  purposes  of 
money  everywhere,  provided  it  were  impossible  to  issue  it  in 
excess  of  commodities  actually  consumed  :  the  very  fact  that 
paper  constitutes  so  large  a  portion  of  the  money  actually 
used  is  a  standing  demonstration  of  the  truth  that  all  money, 
including  gold  and  silver,  can  by  no  possibility  be  used  as 
money  except  in  the  character  of  units  limited  and  localized, 
and  that  there  can  be  no  such  thing  as  barter  where  money 
is  paid.  The  most  important  advantage,  then,  offered  by 
gold  and  silver  as  money,  is  that  they  have  been  distributed 
throughout  the  world  in  exchange  for  commodities,  and  the 
quantities  annually  mined  are  always  small  in  proportion. 

because  gold  and  silver  have  been  thus  distributed,  they 
can  be  redistributed  from  time  to  time  only  in  exchange  for 
commodities,  unless  borrowed  occasionally,  when  they  have 
been  accumulated  in  treasuries  or  banks.  It  is,  therefore,  a 
matter  of  demonstration  beyond  reasonable  doubt,  that  they 
furnish  the  steadiest  possible  circulation  and  therefore  prices. 
Hence,  when  they  are  used  as  banking  reserve,  their  office  is, 
in  point  of  fact  and  of  science,  one  of  limitation  :  their  proper 
function  is,  to  limit  the  circulation  or  distribution  of  money 
by  the  same  rule  by  which  they  have  been  themselves  dis- 


190 


POLITICAL  ECONOMY. 


tributed,  —  the  actual  commerce  and  consumption,  and  not 
the  mere  production  and  sale  of  commodities. 

Deposits,  including  reserve,  belong  in  point  of  fact  and 
science  to  depositors,  although  in  point  of  law  they  belong  to 
the  banks.  Banks  and  depositors  treat  them  as  belonging 
to  the  latter,  although,  in  order  to  extend  legal  protection  to 
depositors,  they  technically  belong  to  the  banks.  The  fact 
that  comparatively  small  sums  are  actually  paid  out  by  banks 
for  the  purpose  of  going  into  circulation,  under  the  labor- 
saving  process  of  "  clearing,"  has  helped  to  create  an  entirely 
erroneous  idea  of  the  true  nature  of  banking  and  bank  loans. 
A  bank  can  no  more  deal  in  its  credit  as  distinguished  from 
reserve  than  —  as  I  have  stated  in  the  dedication  of  this 
work — a  house  can  stand  in  the  air  without  a  foundation. 
A  bank  receives  the  largest  portion  of  its  deposits  from  the 
mercantile  community,  and  it  receives  more  or  less  from  pro- 
ducers and  consumers  generally.  All  bank  deposits  came 
originally  from  what  constituted  the  circulating  money  of 
the  country,  and  this  was  made  up  of  gold,  silver,  and  bank- 
notes. These  still  constitute  circulating  money  for  the  most 
part.  To  suppose  that  dealers  whose  checks  constitute  the 
items  of  the  commercial  part  of  clearings  circulate  units  of 
bank  credit  without  any  reference  to  and  without  any  limi- 
tation by  the  reserve,  while  the  circulation  outside  of  the 
banks  consists  of  the  same  kind  of  money  as  the  reserve 
contains,  involves  what,  upon  a  moment's  reflection,  seems  to 
involve  a  practical  absurdity.  It  is  impossible  to  make  one 
part  of  the  exchanges  of  home  commerce  with  one  kind  of 
money,  and  another  part  with  another  kind  of  money :  the 
volume  of  money  used  in  one  part  must  have  some  connec- 
tion with  that  used  in  every  other  part,  and  with  banking 
fully  developed,  the  only  connection  between  the  exchanges 
cleared  and  those  outside  of  the  banks  must  be  through  the 
reserve.  But  there  can  be  no  such  connection,  unless  the  re- 
serve actually  makes  all  the  payments. 

It  makes  them,  in  point  of  fact,  and  clearings  are  only  the 
register  of  the  payments. 


CHAPTER  VII. 


BEDEMPTION  OF  CURRENCY. 

There  is  a  fallacy  involved  in  the  assertion  that  bank- 
notes, to  insure  stability  and  prevent  inflation  of  volume  and 
fluctuations  in  prices,  ought  to  be  redeemable  on  demand  in 
gold,  because  gold  has  intrinsic  value  as  a  commodity  which 
paper  has  not. 

Of  all  the  fallacies  that  have  concealed  the  true  object  of 
making  all  currency  redeemable  in  gold,  or  gold  and  silver, 
if  the  latter  were  generally  remonetized,  this  is  the  most 
potent  and  probably  the  most  difficult  to  eradicate,  if  indeed 
it  be  possible  to  eradicate  it  at  all.  But  asks  a  banker,  How 
can  it  possibly  be  a  fallacy  ?  If  the  government  stamp  were 
taken  from  gold  to-day,  would  it  not  be  worth  its  weight 
in  gold  to-morrow,  always  and  everywhere  ?  Has  a  bank 
or  government  note,  on  the  other  hand,  any  intrinsic  value 
whatever  if  the  promise  were  taken  off  its  face?  These 
questions,  which  I  have  thus  put  in  the  mouth  of  the  banker, 
are  quite  as  strongly  put  as  he  could  put  them  himself :  they 
embrace  the  whole  case  for  the  theory  of  intrinsic  value  in 
gold  coin  as  a  commodity,  while  still  money,  and  .of  the  ab- 
sence of  intrinsic  value  in  bank-notes.  Before  I  answer  these 
questions  the  banker  may  ask  a  third :  Of  what  importance 
is  the  answer  to  the  questions,  for  the  science  of  money  and 
exchange  ? 

I  proceed  to  answer  the  flrst  two  questions,  and  the  an- 
swer may  furnish  some  facts  to  enable  me  to  answer  the 
third  question.  I  have  already  answered  these  questions 
elsewhere,  and  the  sum  of  the  answers  is  briefly  as  follows  : 
Things  that  are  equal  to  the  same  thing  are  equal  to  each 
other,  and  that  same  thing  to  which  each  is  alike  equal  is 


192 


POLITICAL  ECONOMY. 


equal  to  each,  and  all  are  on  a  par  of  extrinsic  value.  A 
dollar  note,  on  a  par  with  a  gold  dollar,  is  exchangeable  for 
the  same  amount  of  wheat  with  the  gold  dollar,  and  each  is 
the  equivalent  of  the  same  quantity  of  wheat ;  and  therefore 
the  paper  dollar  possesses  the  same  intrinsic  value  as  the 
gold  dollar  while  both  are  money.  Ah  !  says  the  banker, 
but  you  are  arguing  in  a  circle  :  suppose  the  government 
stamp  off,  and  the  gold  dollar  bullion:  it  is  then  worth 
within  a  fraction  of  what  it  was  before,  and  possibly  it  may 
be  worth  more,  if  bullion  is  in  demand.  That  is  all  true, 
my  good  banker  ;  but  if  I  am  in  the  circle,  you  are  out  of  it, 
for  you  have  taken  your  dollar  out  of  the  money  circle,  and 
converted  it  into  bullion,  so  that  it  cannot  circulate  at  all, 
because  it  is  no  longer  money :  it  is  only  the  material  out  of 
which  gold  dollars  and  other  gold  coins  are  made.  My  ar- 
gument related  to  the  gold  while  coin  and  not  bullion.  But 
says  the  banker.  The  stamp  can  be  replaced  on  the  bullion 
for  a  trifling  expense,  and  the  bullion  converted  into  coin 
again  ;  but  the  stamp  and  signatures  on  the  notes  alone  give 
value  to  the  note,  and  notes  of  that  kind  can  be  made  for  the 
very  trifling  cost  of  paper  and  printing ;  but  the  gold  costs 
labor  to  the  extent  of  its  value.  Suppose,  I  reply,  Mr.  Banker 
(to  carry  the  investigation  farther  than  I  have  heretofore), 
that  your  government  should  demonetize  gold  and  monetize 
silver,  platina,  or  any  other  metal  in  its  place  ;  what  becomes 
of  a  considerable  portion  of  the  intrinsic  value  you  have  been 
talking  about  ?  Suppose,  also,  that  in  such  a  case  your  gov- 
ernment, to  prevent  loss  to  individuals,  should  redeem  gold 
with  silver,  provided  the  new  silver  dollars  were  worth  as 
much  as  or  more  than  the  old  gold  dollars.  Would  not  this 
be  redeeming  gold  with  silver  ?  By  this  very  act,  however, 
the  nation  would  suffer  loss,  because  the  government  would 
loose  by  the  depreciation  of  the  gold  and  appreciation  of  the 
silver.  This  last  reason  the  banker  indorses.  But  stop  !  Am 
I  not  entrapped  now  by  this  same  old  fallacy  of  superior  in- 
trinsic value  in  the  gold  dollar  over  the  paper  dollar?  Surely 
I  am,  for  who  has  lost,  or  who  has  gained  ?  Is  it  not  cer- 
tain that  the  intrinsic,  that  is  to  say  the  exchangeable,  value 


KEDEMPTION  OF  CURRENCY. 


193 


(for  intrinsic  value  is  exchangeable  value)  lost  by  the  gold 
throughout  the  commercial  world  —  and  gold  is  the  money  of 
that  world  —  is  carried  over  into  the  silver  ?  And  if  no  part 
of  the  commercial  world  loses  anything,  the  government  and 
people  causing  the  demonetization  have  lost  nothing  ;  it  has 
only  deranged  the  monetary  exchanges.  But  intrinsic  value 
in  gold  represented  by  a  very  large  amount  of  labor  has 
been  annihilated  by  a  short  legislative  act,  the  meaning  of 
which  is,  —  The  people  represented  by  this  government  have 
concluded  to  demonetize  gold  and  annihilate  its  whole  intrin- 
sic value  as  money  as  well  as  its  intrinsic  value  as  a  commod- 
ity by  a  considerable  ratio,  because  they  think  it  for  their 
interest,  and  the  annihilation  costs  less  than  the  printing, 
signing  and  issuing  of  notes  to  take  the  place  of  an  equal 
amount  of  the  annihilated  intrinsic  value  of  the  gold. 

But  says  our  banker,  This  demonetized  gold  can  be  taken 
to  other  countries,  and  it  is  still  good,  while  the  paper  is 
not.  Granted,  say  I ;  but  suppose  all  other  governments  to 
conclude  that  they  will  get  a  steadier  volume  of  silver  than 
they  can  of  gold  money  units  in  consequence  of  this  first  de- 
monetization by  one  government  ;  and  therefore  (more  es- 
pecially if  the  production  of  gold  should  happen  to  be  on  the 
increase)  all  nations  demonetize  gold  and  remonetize  silver ; 
an  enormous  loss,  probably  seventy-five  per  cent.,  would  fall 
upon  the  holders  of  gold,  but  not  one  cent  of  loss  upon  the 
nations  ;  total  values  would  be  precisely  the  same,  because  all 
the  intrinsic  value  in  the  gold,  AS  money,  is  carried  over  to 
and  embodied  in  the  silver,  at  less  cost,  perhaps,  than  issu- 
ing so  much  paper.  Gold,  as  money,  no  longer  possesses  one 
cent  of  intrinsic  value,  but  it  possesses  considerable  intrinsic 
exchangeable  value  as  a  commodity  ;  and  here,  at  last,  is  the 
only  intrinsic  value  possessed  by  gold  superior  to  other  metal 
and  to  notes ;  but  as  money  it  possesses  no  more  intrinsic 
value  than  any  other  money  at  par.  This  whole  matter  of 
money  is  conventional,  then,  after  all :  one  kind  of  money  is 
as  real  as  another  if  it  will  exchange  for  as  much.  By  the 
clearest  demonstration,  then,  it  appears  that  a  government 
paper  dollar,  a  bank-note  dollar,  a  credit  dollar,  and  a  gold 

13 


194 


POLITICAL  ECONOMY. 


dollar,  are  equally  money  whenever  they  are  taken  as  such, 
at  any  given  time  and  place,  and  the  ultimate  and  real  re- 
demption of  all  money  is  by  commodities.  A  gold  dollar, 
like  a  paper  dollar  maintained  at  par,  represents  nothing  but 
itself  strictly  :  it  is  a  conceded  demonstration  in  the  holder's 
hands,  universally  acted  upon,  of  the  right  of  the  holder  to 
obtain  in  exchange  values,  of  which  it  is  the  measure,  and 
which  measure  also  its  value,  —  the  quantity  of  money  of- 
ered  for  sale  determining  the  value  of  all  other  units  of 
things  in  market  as  expressed  in  price,  and  these  units  de- 
termining the  value  of  money  as  expressed  by  quantity  of 
money  units  offered.  Money,  therefore,  as  money^  has  no 
intrinsic  value  as  a  commodity ;  it  is  no  part  of  productive 
wealth,  because  it  must  be  got  rid  of  and  exchanged  before 
any  productive  value  of  anj^  kind  can  be  obtained  for  it.  It 
is  a  great  power,  nevertheless,  to  get  wealth,  and  might  well 
be  taxed,  provided  real  capital  itself  could  be  exempted  to 
an  equal  amount ;  but  it  is  not,  and  therefore  there  is  double 
taxation  of  actual  wealth,  that  is  to  say,  of  production,  by  the 
taxation  of  money,  for  the  total  of  money  calls  for  a  total  of 
productions  equal  to  its  total  volume  which  has  been  delivered 
by  the  holders  of  the  money  personally  or  representatively  to 
the  rest  of  the  commercial  world.  A  stockholder  in  a  na- 
tional bank,  therefore,  who  pays  a  state  tax  on  the  par  value 
or  more  of  his  stock  to  a  state  government,  while  others,  not 
stockholders,  pay  taxes  on  only  about  one  third  of  their  pro- 
ductive property,  and  whose  bank,  also,  after  paying  a  tax  on 
circulation,  pays  a  tax  on  its  debts  in  the  shape  of  deposits 
which  are  in  effect  powers  of  record  to  put  in  circulation  gold 
or  bank-notes  to  an  equal  amount,  is  taxed  four  times  as  much 
as  his  neighbors  who  are  not  stockholders,  because  they  pay 
no  tax  to  the  general  government.  It  would  seem  to  be  the 
intention  of  the  state  and  general  governments,  therefore,  to 
tax  these  banks  out  of  existence  and  restore  the  state  banks 
by  the  same  kind  of  process  that  heretofore  taxed  the  state 
banks  out  of  existence  and  gave  the  field  of  circulation  to 
the  national  banks. 

The  deposit,  so  far  as  the  depositor  actually  uses  it,  is  a 


REDEMPTION  OF  CURRENCY. 


195 


power  equivalent  to  a  like  amount  in  money  :  it  is  an  ad- 
mitted demonstration  of  the  depositor's  right  to  circulate  a 
like  amount  of  money.  The  power  belongs  to  the  depositor, 
and  not  to  the  bank.  Whatever  furnishes  this  demonstra- 
tion is  money,  because  that  money  is  used  at  all,  is  entirely 
conventional,  and  convention  has  the  right  to  adopt  any  form 
of  demonstration  it  pleases.  The  national  form  is  the  equiv- 
alent of  the  international,  in  the  home  market.  But  says 
our  banker,  Is  it  just  that  the  unfortunate  holders  of  gold 
should  lose  seventy-five  per  cent,  of  the  intrinsic  value  of 
their  gold  by  demonetization,  while  the  nation,  as  a  whole, 
loses  nothing,  because  silver  gains  what  gold  loses,  the  losers 
sharing  indirectly  in  that  gain  only  to  the  amount  of  a  very 
moderate  percentage  of  their  loss  ?  By  no  means,  I  answer. 
The  governments  should  exchange  with  them.  The  govern- 
ments should  buy  silver,  coin  it,  and  exchange  it  with  the 
holders  of  gold,  and  the  loss  should  be  distributed  upon  the 
nation.  Loss,  did  I  say  ?  I  have  been  entrapped  again  by 
the  old  fallacy.  There  will  be  in  this  way  no  national  loss 
at  all.  The  effect  of  this  equitable  proceeding  is  merely  to 
distribute  back  to  the  holders  of  gold  alone  all  the  gain  the 
nation  has  or  could  have  made  by  the  monetization  of  the 
silver.  Not  to  do  this  would  be  robbery,  and  nothing  else, 
for  there  would  be  no  national  gain  or  loss,  either  way. 
But  this  last  act  of  equity  has  left  in  the  hands  of  all  the 
governments  the  total  of  the  commercial  world's  gold  coin. 
If  thrown  all  at  once  upon  the  markets  of  the  world,  its  ex- 
changeable value  will  be  proportioned  to  its  quantity.  Every 
pound  of  it  can  be  sold,  because  every  pound  of  it  can  be 
used,  and  there  is  no  danger  of  deterioration.  But  if  it  is 
all  thrown  upon  the  market  at  once,  it  can  hardly  realize 
ten  per  cent,  of  its  former  value.  Therefore,  to  avoid  this 
immense  loss,  it  ought  to  be  sold  very  slowly,  as  the  de- 
mand for  it  may  determine,  and  thus  be  gradually  distrib- 
uted through  all  parts  of  the  commercial  world.  But  stop  ! 
I  have  been  entrapped  again.  There  will  be  no  difference 
by  and  by,  nationally  or  internationally,  between  the  two 
plans.    If  the  metal  is  all  sold  immediately  to  the  highest 


196 


POLITICAL  ECONOMY. 


bidders,  especially  should  there  be  "rings"  of  purchasers, 
great  profits  on  the  rise  of  the  commodity  will  be  made  by 
the  first  buyers,  and  less,  but  still  great,  profits  by  those  to 
whom  they  sell,  —  and  so  on,  until  the  whole  metal  is  sold 
and  distributed  in  articles  of  convenience  and  luxury.  It 
will,  therefore,  be  most  equitable  to  sell  slowly,  according  to 
the  demand,  and  thus  distribute  the  gains.  These  gains  will 
not  be  imaginary,  but  really,  and  not  theoretically,  intrinsic. 
Actual  wealth,  great  utility,  and  civilization  itself,  will  be 
highly  promoted  by  the  demonetization.  Great  intrinsic 
value  is  now  possessed  by  gold  as  a  commodity^  but  none 
as  money  ;  in  fact,  a  considerable  portion  of  its  supposed 
intrinsic  value  as  coin  has  been  carried  over  to  it  as  a  com- 
modity. Its  value  as  money  was  wholly  conventional ;  its 
value  as  a  commodity  is  real,  and  independent  of  conven- 
tion. Its  intrinsic  utility  makes  it  valuable.  We  have,  more- 
over, learned  a  very  important  truth,  if  we  are  only  able  to 
carry  it  always  with  us  as  a  touchstone  against  fallacies  : 
what  we  called  intrinsic  value  of  gold  as  a  commodity,  while 
it  was  money,  had  nothing  to  do  directly  with  its  intrinsic 
value  as  money,  for  the  demonetization  shows  us  that  the 
intrinsic  value  of  all  money  is  conventional,  and  dependent 
upon  the  fact  that  it  will,  by  virtue  of  convention,  founded 
on  the  necessities  of  society,  exchange  for  everything  else ; 
and  if  convention  has  made  a  paper  dollar  buy  the  same 
amount  as  a  gold  dollar,  each  has  conventionally  the  same 
value,  and  neither  can  have  such  value  at  all  except  conven- 
tionally. The  same  demonstration  must  necessarily  include 
a  dollar  of  bank  credit,  if  that  will  procure  as  much  as  the 
gold  dollar;  the  fallacy  that  entraps  the  understanding  in 
the  latter  case  being  that  certain  instruments  and  certain 
debts  are  assumed  to  have  all  a  like  effect,  when  they  do 
not,  because  not  used  alike.  A  check  is,  for  instance,  an  in- 
strument which  is  a  voucher  to  a  banker  to  deliver  gold  or 
notes,  or  to  transfer  or  cancel  credit,  the  precise  equivalent 
of  a  like  sum  in  bank-notes,  and  when  canceled  and  re- 
turned to  the  drawer  it  is  a  voucher  of  payment  accom- 
plished.   Again,  large  amounts  of  savings  bank  and  private 


REDEMPTION  OF  CURRENCY. 


.197 


bank,  and  private  or  individual  deposits,  must  be  eliminated 
in  ascertaining  the  total  volume  of  credits  that  have  merely 
taken  the  place  of  like  amounts  in  bank-notes.  In  a  strict 
sense,  deposit  credits  are  not  money  ;  they  are  powers  to  put 
in  circulation  the  money  of  a  common  fund.  But  asks  our 
banker,  Is  not  the  money  unit  in  the  shape  of  a  tangible 
gold  dollar  now  carried  over  to  the  silver  dollar  ?  Can  there 
be  any  money  unit  that  is  not  tangible  and  valuable  also  as 
a  commodity  ?  If  there  cannot,  how  can  a  paper  dollar, 
much  less  a  credit  dollar  on  bank-books,  not  tangible  like 
a  paper  dollar,  and  existing  only  in  imagination,  be  called 
money  ?  Is  the  dollar,  the  pound,  the  franc,  and  the  guilder, 
a  thing  of  the  imagination,  or  is  it  a  reality  ?  I  answer 
that  the  foregoing  demonstration  furnishes  the  answer  to  all 
these  questions.  Because  the  paper  dollar  commands  the 
same  value  as  the  gold  dollar,  that  is  demonstration  clear 
by  the  very  fact  that  the  moment  money  intervenes,  the 
money-unit  is  ideal  only,  and  it  necessarily  must  be  so  with 
all  money.  If  a  bushel  of  wheat  were  the  unit  agreed  upon 
in  the  United  States,  there  would  be  actual  deliveries  of 
wheat  as  money,  while  there  would  be  many  deliveries  of  it 
as  a  commodity.  The  bushel  of  wheat  being  agreed  upon, 
the  term,  without  the  actual  presence  of  any  wheat,  at  once 
suggests  the  unit  and  its  value,  and  the  unit  of  wheat  could 
be  carried  over  to  anything  else  and  called  unit  of  weight  or 
unit  of  measure,  the  new  unit  taking  the  place  of  the  other, 
and  being  exchangeable  for  the  same  amount.  The  value 
of  wheat  as  a  commodity  would  be  merged,  like  the  gold,  in 
its  value  as  money ;  but  inasmuch  as  it  is  an  article  of  prime 
necessity,  and  not  like  gold  only  relative  to  civilization  and 
progress,  and  being  every  day  consumed,  while  but  annually 
produced,  the  frequent  variations  in  the  quantity  in  market 
would  lead  to  great  expansion  and  contraction  of  volume, 
and  unless  notes  calling  for  wheat  were  made  payable  at 
tide-water  there  would  be  a  difference  in  exchange  varying 
from  ten  to  fifty  per  cent,  or  more. 

The  money  units  I  now  suppose  to  be  bushels  of  wheat 
containing  a  certain  number  of  pounds  instead  of  weight- 


198 


POLITICAL  ECONOMY. 


units  of  gold.  Either  the  wheat  or  the  gold  might  be  con- 
verted into  units  of  measure  instead  of  weight  by  making 
the  unit  of  wheat  call  for  a  certain  measure  of  wheat,  and 
the  unit  of  gold  for  a  cylinder  of  a  fixed  diameter  and  depth. 
The  decimal  principle  might  be  applied  to  either  or  both ; 
and  as  the  standard  of  weight  would  be  adopted,  because 
most  reliable  and  least  variable,  a  hundred  pounds  of  wheat 
taken  as  the  unit  instead  of  the  bushel  of  sixty  pounds 
might  be  called  a  cental  of  wheat,  or,  to  save  words,  a  cental ; 
and  in  like  manner  now  (gold  being  still  the  United  States 
standard)  a  piece  of  uniform  weight,  to  be  known  by  one 
name  implying  a  unit  of  weight,  ought  to  be  universally 
adopted  by  all  nations.  I  now  suppose  the  cental  of  wheat, 
or  the  cental,  as  we  may  call  it,  to  be  the  unit,  and  we  shall 
soon  see  that  the  reserve  against  notes,  if  issued,  is  exceed- 
ingly variable  within  short  periods,  but  not  upon  long  aver- 
ages ;  there  is  also  a  great  variation  in  volume  of  notes  and 
credits,  as  there  always  is  in  the  United  States  even  with  a 
gold  reserve.  These  two  sources  of  variation  render  the 
money  intolerably  variable,  and  the  reserve  wheat  over  and 
above  what  is  consumed  at  home  and  can  be  consumed  im- 
mediately abroad  is  exported  in  large  quantities,  because, 
although  sent  to  a  market  not  absolutely  needing  it,  it  will 
bring  more  abroad  than  at  home. 

CONSEQUENCES  OF  ADOPTING  THE  CENTAL  OF  WHEAT  AS 
THE  MONEY  UNIT. 

The  cental  of  wheat  being  money  as  well  as  a  commodity, 
is,  while  in  reserve  against  notes  and  bank  credit,  although 
still  called  money,  in  reality  but  merchandise,  because  it  does 
not  regulate  the  volume  of  notes  and  credits  by  any  fixed 
standard. 

There  is  but  one  way  to  get  rid  of  that  source  of  variation, 
and  that  is,  to  keep  a  reserve  of  wheat  centals  in  a  constant 
ratio  with  notes  and  credits,  because  by  this  plan  the  notes 
and  credits  will  vary  at  least  as  all  wheat  varies.  This  plan 
adopted,  but  one  source  of  variation  is  left,  and  that  is  of 
wheat :  the  notes  and  credits  now  vary  only  as  wheat  varies ; 


REDEMPTION  OF  CURRENCY. 


199 


and  the  intrinsic  value  of  wheat  as  money,  and  therefore  as  a 
commodity,  is  reduced  in  proportion  to  the  total  of  notes  and 
credits  outstanding  precisely  as  the  intrinsic  value  of  gold  as 
money  and  therefore  as  a  commodity,  is  actually  reduced 
throughout  the  commercial  world  by  the  substitutes  in  the 
shape  of  paper  and  credit  dollars,  pounds,  etc.  The  intrinsic 
value  of  wheat  as  money  entirely  controls  its  value  as  a  com- 
modity ;  in  short,  it  is  absolutely  impossible  for  it  to  possess 
any  intrinsic  value  as  a  commodity  in  excess  of  its  value  as 
money.  But  the  ratio  of  its  value  as  a  commodity  has  been, 
in  fact,  enormously  depreciated  after  making  it  money, 
through  the  issue  of  notes  ;  and  if  demonetized  its  intrinsic 
value  as  a  commodity  would  rise  much  above  its  former  value 
as  money,  and  this  renders  it  wholly  unfit  for  money,  because 
the  consumption  of  it  continually  as  a  commodity  makes  the 
annual  variations  too  great.  It  is,  therefore,  demonetized,  and 
silver  units  of  weight  take  its  place,  perhaps  with  the  old 
name  of  cental.  No  loss  arises  in  this  case  any  more  than  in 
the  former,  but  on  the  contrary  a  benefit,  by  the  restoration 
of  the  natural  equilibrium  of  prices  among  the  necessaries  of 
life.  After  a  time,  however,  the  ratio  of  increase  in  the 
quantity  of  silver  is  found  to  be  too  great  to  continue  it  as 
a  material  for  money,  and  some  method  having  been  dis- 
covered to  make  paper  centals  vary  with  commerce  better 
than  silver  had  done,  the  silver  centals  are  all  redeemed  by 
the  government  with  paper  centals  issued  in  their  place, 
upon  the  same  principle  by  which  the  banks  of  Venice  and 
Amsterdam  redeemed,  —  that  is  to  say  exchanged  silver  and 
gold  coin  with  credits  in  bank,  which  they  were  able  to  do  for 
the  sufficient  reason  that  the  total  volume  of  their  credit 
money  was  never  carried  above  that  of  coin  ;  and  the  credit 
was  more  valuable  than  coin  by  reason  of  the  law,  the  con- 
venience, and  insurance  against  loss  by  defaced  and  short 
weight  coin.  The  value  of  the  unit  of  money,  therefore,  in 
all  cases,  lies  in  what  it  exchanges  for  and  not  in  itself. 
Hence  it  is  wholly  conventional  and  therefore  wholly  ideal. 
But  although  ideal,' it  is  not  without  any  limitation  of  the 
number  of  units.  It  is  limited  either  by  the  material  which 
supplies  the  units  or  by  commodities. 


200 


REDEMPTION  OF  CURRENCY. 


WHAT  REDEMPTION  OF  A  CURRENCY  IS. 

A  redemption  of  currency  is  an  exchange  of  it  for  another. 
We  have  seen  that  demonetization  on  a  national  or  inter- 
national scale  is  merely  the  abandonment  of  one  currency 
and  exchanging  it  for  another,  without  loss  to  anybody,  the 
holders  calling  upon  government  to  redeem  it  by  giving 
them  something  else,  whether  it  be  in  the  shape  of  pieces  of 
some  other  metal,  or  paper  promises,  wheat,  etc.  The  re- 
demption in  wheat  cost  the  nation  nothing,  for  the  holders 
of  the  metallic  money  were  by  virtue  of  their  money  the 
owners  of  productions  to  be  received  to  that  amount,  having 
previously  exchanged  productions  for  the  metallic  money,  — 
the  purchase  and  delivery  of  wheat  to  them  by  the  govern- 
ments, in  exchange  for  their  metallic  money,  being  the  same 
thing  as  if  they  had  all  purchased  wheat  in  the  market  with 
their  metallic  money,  instead  of  an  assortment  of  other  pro- 
ductions, without  any  redemption  of  the  metallic  currency 
taking  place  through  act  of  government  at  all.  In  like  man- 
ner the  redemption  of  the  wheat  centals  in  silver  centals, 
and  the  redemption  of  the  latter  by  paper  centals  or  prom- 
ises of  centals  (it  is  a  matter  of  indifference  which  they  are 
called),  cost  the  government  nothing.  Now,  if  some  base 
metal,  not  exceeding  gold  in  mass  and  weight,  of  durable 
qualities,  but  of  no  utility  or  value,  should  be  discovered,  and 
weight  or  measure  units  called  centals  coined  from  it,  it 
would  be  a  good  and  durable  coin  to  redeem  the  paper  with, 
provided  it  could  be  mined,  smelted,  and  coined  fast  enough 
to  increase  with  the  world's  commerce,  but  no  faster  ;  and  it 
would  not  be  subject  to  the  variations  of  the  paper  centals, 
and  for  that  reason  and  durability  alone  it  would  be  better 
than  the  paper,  neither  of  them,  however,  having  any  "  in- 
trinsic value "  whatever.  Hence  it  appears  that  the  "  in- 
trinsic value  "  may  be  taken  out  of  money  altogether.  But 
is  it  not  now  manifest  that  there  never  was  any  intrinsic 
value  to  take  out  at  all  ?  Is  it  not  now  certain  that,  instead 
of  intrinsic^  the  value  of  money  is  extrinsic  ?  Is  it  not  clear 
that  all  value  possessed  by  anything  must  be  extrinsic,  for 


REDEMPTION  OF  CURRENCY. 


201 


does  not  value  imply  that  the  thing  to  which  value  is  imputed 
must  be  valued  (that  is  to  say,  measured)  by  something  (that 
is  to  say  by  anything)  else  for  which  it  is  exchanged,  the  lat- 
ter constituting  the  value  ?  Therefore  it  is  certain  that  there 
is  no  such  thing  as  intrinsic  value.  The  very  term  implies  a 
contradiction  in  terms.  Intrinsic  value  vanishes  into  intrin- 
sic utility,  greater  or  less  ;  either  absolute  (that  is  to  say, 
absolutely  necessary,  like  wheat,  to  sustain  life),  or,  like 
gold,  relative  (that  is  to  say,  relatively  necessary  to  civiliza- 
tion in  the  way  of  arts,  or  in  the  way  of  comfort  and  con- 
venience, as  in  dentistry,  etc.).  The  absolute  utility  of  wheat 
rendered  it  wholly  unfit  for  money  ;  the  relative  utility  of 
gold  made  it  the  best  possible  material  for  money,  and  to 
regulate  the  volume  of  .all  substitute  money.  All  the  gold  in 
the  world  has  utility,  because  it  can  all  be  used,  but  at  the 
same  time  it  can  also  be  dispensed  with ;  and  therefore,  as 
its  exchangeable  (that  is  to  say,  its  money)  value  becomes 
less  by  the  increased  ratio  of  its  production  (the  ratio  has 
been  one  of  decrement,  but  will  probably  soon  be  one  of  in- 
crement), and  still  more  by  the  use  of  paper  and  credit  sub- 
stitutes, the  ratio  of  utility  comes  into  operation,  and  checks 
more  or  less  the  ratio  of  increment.  The  latter  ratio  has 
enormously  increased  of  late  years  by  the  substitution  of 
inconvertible  paper  in  large  amounts  in  the  United  States 
for  convertible  notes,  and  a  corresponding  increase  of  cred- 
its. The  mischief  was  enhanced  in  the  United  States  by 
two  auxiliary  causes,  one  of  which  could  have  been  avoided, 
the  other  not. 

The  voidable  cause  was  the  making  government  debt  and 
interest  payable  in  gold.  As  a  political  measure  it  might 
have  been  well  to  make  the  two  or  three  hundred  millions 
of  government  debt  first  issued  payable  in  gold,  in  order  to 
locate  it  in  foreign  markets,  because  this  would  call  into 
action  a  powerful  political  influence  abroad  in  favor  of  the 
government ;  but  after  that,  all  debt  and  interest  ought  to 
have  been  made  payable  in  paper,  in  order  to  retain  as  much 
gold  at  home  as  possible ;  not  because  it  cannot  be  recalled 
on  a  return  to  specie  payments,  but  to  avoid,  as  far  as  pos- 


202 


POLITICAL  ECONOMY. 


sible,  the  inevitable  depreciation  of  gold  throughout  the  com- 
mercial world  resulting  from  loss  of  our  stock  on  hand  and 
the  larger  part  of  our  annual  share  for  years.  The  unavoid- 
able cause  was  the  feeling  of  doubt  as  to  results,  culminating 
at  the  battle  of  Gettysburg,  running  up  the  premium  on  gold 
to  enormous  figures,  and  keeping  it  at  high  figures  during 
the  war.  This  was  beneficial  in  one  respect,  because  it  en- 
couraged home  industry  by  discouraging  importations ;  but 
the  benefit  was  partially  counteracted  by  the  enormous  in- 
crease of  bank  loans  to  extend  the  new  industry  thus  called 
into  being,  the  enormous  increase  of  production,  and  the 
consequently  enormous  volume  of  money-units  put  in  circu- 
lation by  means  of  bank  loans  in  the  shape  of  notes  and 
credits. 

THE  MEASURE  OF  VALUE  IN  PRICE  AS  REGULATED  BY 
THE  MAINTENANCE  OF  PURCHASING  POWER. 

It  results  from  this  demonstration,  and  the  demonstration 
I  have  elsewhere  given,  that  price  is  the  ratio  of  all  the 
money  in  market  paid  to  all  the  goods  in  market  bought ; 
that  money  constituting  the  units  of  value  and  the  goods  the 
units  of  quantity  valued.  The  immense  number  of  money 
units  kept  in  the  market  by  means  of  bank  loans  up  to 
1873  in  the  United  States,  raised  the  expenses  of  living  to 
such  enormous  figures  that  our  gold  and  silver  were  largely 
exported,  and  a  large  amount  of  foreign  travel  amounting 
almost  to  emigration  supervened  at  the  close  of  the  war,  and 
became  an  additional  cause  for  carrying  abroad  large  quanti- 
ties of  gold.  The  consequence  is  that  the  increase  of  prices 
through  depreciation  of  gold  abroad  must  be  first  met  and 
overcome  on  our  return  to  specie  payments. 

But  says  our  banker,  I  will  now  put  the  question,  Of 
what  importance,  practically,  to  the  science  of  money  and 
exchange,  is  your  demonstration,  and  what  do  you  propose  to 
do  about  it  ?  What  does  it  amount  to  ?  Is  it  not  a  mere 
question  of  words  ?  I  answer  that  it  is,  and  something  more. 
It  has  been  demonstrated  that  the  earth  revolves  daily  upon 
its  axis,  while  to  the  senses  the  sun  seems  to  revolve  around 


REDEMPTION  OF  CURRENCY. 


203 


the  earth ;  and  notwithstanding  the  demonstration  of  the  fact 
that  it  does  not,  our  language  and  our  actions  correspond 
with  the  appearance  and  not  with  the  demonstrated  fact.  It 
is  perfectly  certain  that  all  the  holders  of  money  have  been 
personally  or  representatively  the  sellers  of  products  or  cap- 
ital, and  most  largely  of  the  former,  and  so  far  have  pro- 
duced personally  or  representatively,  and  that  the  buyers,  on 
the  other  hand,  kave  bought  to  consume  personally  or  repre- 
sentatively, and  are  therefore  consumers  ;  the  character  of  the 
actor  changing  accordingly  as  he  buys  or  sells.  The  change 
of  the  relation  is  effected  with  money,  and  money  has  no 
use  or  value  beyond ;  but  the  actual  fact  that  gold  as  a  com- 
modity and  silver  as  a  commodity  will  bring  about  the  same 
by  weight  as  gold  and  silver  in  coin,  leads  to  the  impres- 
sion that  coin  has  a  like  intrinsic  value  in  its  character  of 
money.  No  mental  distinction  is  made  between  the  two 
values  in  human  action :  gold  and  silver  can  and  do  both 
retire  largely  into  reserve  or  hoard,  and  are  not  loaned,  but 
kept  indefinitely  and  with  perfect  safety  against  loss,  unless 
by  force  or  fraud,  through  which  all  things  are  liable  to  be 
lost.  Were  they  loaned  they  could  only  be  used,  unless  ex- 
ceptionally, in  production  ;  for,  as  I  have  just  shown,  all  hold- 
ers of  money  are  producers  personally  or  representatively  in 
effect,  because  they  buy  of  a  producer  in  person,  or  of  him 
representatively  through  a  merchant ;  and  thus  cause  an  ad- 
ditional amount  of  production  equal  to  the  value  of  their 
money  to  take  place.  The  borrower  is  more  especially  a 
producer,  however,  because  he  cannot,  unless  exceptionably, 
borrow  to  consume  only,  but  must  borrow  to  produce  or  buy 
of  a  producer  or  merchant  for  the  consumption  of  many  others 
beside  himself. 

When  there  are  no  calls,  therefore,  for  loans  to  aid  in  further 
production,  immense  masses  of  the  precious  metals  can  be 
retired  as  they  are  into  reserves  or  hoards  for  indefinite  periods 
as  in  semi-barbarous  countries.  This  feeling  of  confidence  in 
gold  and  silver  coin  keeps  large  amounts  of  it  in  reserve  every- 
where, and  causes  an  inconvertible  paper  currency,  if  issued, 
to  move  freely  and  retire  the  metallic  one.    This  was  and  is 


204 


POLITICAL  ECONOMY. 


the  case  in  France,  and  was  the  case  in  the  United  States  in 
1856-57,  when  over  one  hundred  millions  of  coin  were  virt- 
ually retired  in  the  hands  of  the  people ;  a  currency  nomin- 
ally convertible,  and  more  or  less  depreciated,  performing 
nearly  all  the  functions  of  circulation,  the  metal  very  seldom 
making  its  appearance.  The  demand  for  gold  to  hold  during 
the  war ;  the  making  government  debt  and  interest  payable  in 
gold  ;  the  immense  energy  and  activity  of  production  during 
and  after  the  war ;  foreign  travel  and  the  emigration  of  citi- 
zens ;  and  the  habits  of  the  people,  comparatively  less  con- 
servative than  before,  sent  gold  abroad  instead  of  retiring 
it  at  home.  On  the  whole,  then,  the  fallacy  of  intrinsic  value 
in  gold  and  silver  has  a  very  conservative  effect  in  making 
the  volume  of  gold  and  silver  money-units  steady,  and  the 
habit  will  be  persisted  in  against  any  demonstration  of  the 
fallacy.  The  effect  amounts  to  this:  the  fact  that  gold  or 
gold  and  silver  as  money  are  always  worth  as  much  as  a 
like  weight  of  bullion  and  plate,  and  that  paper  money,  aside 
from  the  engraving  and  signatures,  and  the  solvency  of  the 
bank  together,  and  the  bank  credit  aside  from  the  solvency 
of  the  bank  alone,  are  worthless,  retire  large  amounts  of  coin 
from  circulation  while  paper  is  used.  Were  there  no  paper 
the  retirement  would  be  less  in  proportion. 

But  says  our  banker,  You  now  admit  that  coin  is  worth  as 
much  as  bullion  and  bullion  is  a  commodity :  whoever  has 
coin  has  a  commodity,  that  is  to  saj?-,  bullion,  and  whoever 
has  bullion  virtually  has  coin.  Yes,  say  I,  but  as  I  have 
demonstrated  already,  the  bullion  can  never  be  worth  more 
than  the  coin,  excepting  nominal  figures ;  and  suppose  the 
exchangeable  value  of  the  coin  as  money  to  have  been  largely 
depreciated  by  the  issue  of  paper  and  the  creation  of  credit 
dollars  which  I  have  shown  to  be  worth  as  much  as  gold 
dollars,  where  goes  the  bullion  ?  Does  it  not  now  in  its  de- 
preciation follow  the  lead  of  the  coin  ? 

If  you  debase  the  value  of  the  gold  coin  by  the  issue  of 
substitutes,  what  possible  advantage  have  you  gained  by  the 
exchange,  that  is  to  say,  redemption,  of  the  paper  with  the 
gold  dollar :  in  other  words,  what  advantage  is  there  in  re- 


REDEMPTION  OF  CURRENCY. 


205 


deeming  at  all?  Of  what  possible  use  is  it  to  debase  a 
currency  by  increase  without  limit,  and  then  to  attempt  to 
restore  its  value  by  exchanging  it  for  one  which  the  over- 
issue has  already  debased  in  company  with  itself  ?  Is  it  not 
like  a  ship  attempting  to  ascertain  its  distance  from  shore  by 
comparison  with  another  ship  that  has  left  the  shore  ?  To 
imagine  that  you  have  made  a  useful  redemption  or  exchange 
of  currency  for  gold,  because  gold  has  intrinsic  value  as  a 
commodity,  and  is  therefore  a  good  thing, and  a  safe  thing  to 
keep,  is  folly  indeed  in  a  commercial  sense. 

But  says  our  banker,  I  deny  your  assumption,  for  it  cer- 
tainly is  an  assumption  without  proof  that  paper  and  credit 
dollars,  at  least  the  latter,  are  money,  and  that  they  can  have 
any  possible  effect  as  such  in  raising  prices  by  an  increase  of 
money-units  called  an  inflation  of  money.  These  guaranties 
of  bankers,  called  bankers'  credits,  may  cause  an  inflation  of 
credits,  —  and  all  credits  are  alike  in  that  respect,  —  but  they 
never  can  cause  an  inflation  of  money  simply  because  they 
are  not  money  ;  therefore  they  cannot  cause  an  excess  or  glut 
of  any  particular  commodity  as  compared  with  others ;  but 
unduly  expanded  credit  is  the  cause  of  unproductive  invest- 
ment and  national  loss  ;  and  these  bring  on  banking  and  in- 
dustrial crises. 

But,  my  good  banker,  which  of  us  maintains  his  assertions 
without .  proof,  and  which  with  proof  ?  Your  argument  is 
mere  assertion,  but  I  have  absolutely  demonstrated  the  fact 
that  the  money-unit  can  be  embodied  in  any  of  the  sub- 
stances named,  and  finally,  that  the  latter  can  be  redeemed 
with  paper,  and  that  in  all  transfers  of  bank  credit  the  result 
is  the  same,  whether  gold  or  notes  are  withdrawn  and  then 
redeposited  or  not:  it  is  only  a  matter  of  clearing  or  not 
clearing. 

But  says  the  banker,  have  not  the  ablest  writers  of  the 
day  insisted,  and  do  not  eminent  bankers  generally  insist,  that 
credit  is  credit  and  nothing  else,  and  that  credit  in  the  shape 
of  bank-notes,  bills,  checks,  and  bank  credits  alone  acts  on 
prices  ? 

Yes,  my  good  banker,  they  have  and  do,  but  as  you  only 


206 


POLITICAL  ECONOMY. 


repeat  your  assertion  without  argument  or  reason  again,  by- 
referring  to  undoubtedly  high  authority,  I  perceive  very 
clearly  that  both  you  and  they  are  arguing  in  a  circle  con- 
sisting of  credit  returning  into  credit.  I  agree  with  you 
that  credit  is  the  cause,  beyond  the  possibility  of  a  doubt, 
but  I  proceed  one  step  farther  and  add  after  credit  the  three 
words,  converted  into  money.  The  conversion  costs  a  pre- 
mium called  interest.  To  speak  more  fully,  mercantile 
credit,  having  no  currency  as  money,  is  exchanged  for  bank 
credit  in  convenient  amounts,  having  currency  as  money  as 
well  as  a  much  higher  credit.  This  takes  the  place  of  and 
has  by  controlling  circulation  in  the  reserve  the  same  effect 
in  swelling  the  number  element  in  the  ratio  which  makes 
price  as  against  the  other  element  of  the  ratio,  quantity  of 
units  of  weight  or  measure  of  goods  in  market,  which  re- 
mains stationary,  as  an  equal  number  of  money  units  made 
tangible  in  gold.  Prices  are  therefore  raised,  not  by  mere 
credit,  but  by  money.  Credit  acts  on  commodities  ;  money 
on  prices.  Suppose  money  aside  and  exchanges  made  as 
freely  by  barter  as  by  money :  it  is  the  business  of  a  banker 
now  only  to  guaranty  personal  credits  for  a  consideration. 
He  guaranties  manufacturers  A.,  B.,  &  C,  and  they  procure 
necessaries  for  workmen  on  the  strength  of  the  guaranty. 
Of  what  effect  is  it  towards  producing  a  general  rise  of  val- 
ues in  exchange  ?  None  whatever.  A.,  B.,  &  C.  cannot  bor- 
row necessaries  on  the  strength  of  the  guaranties  so  far  as  to 
create  a  glut  and  become  bankrupt.  Long  before  that  point 
is  reached  they  are  compelled  to  sell :  the  credit  has  acted 
so  as  to  depress  the  value  of  their  manufactured  stock  and 
raise  the  necessaries ;  that  is  to  say,  it  has  acted  only  on 
commodities. 

But  says  the  banker,  I  was  supposing  the  existence  of 
money  in  the  shape  of  gold  coin,  and  therefore  a  currency  to 
effect  exchanges  and  not  barter. 

Well,  say  I,  suppose,  instead  of  barter,  t^he  existence  of 
money,  and  that  the  banker  guaranties  without  loans,  as  be- 
fore :  it  is  still  personal  credit  and  not  money,  and  the  result 
is  the  same :  the  credit  has  acted  on  commodities  also  in 


REDEMPTION  OF  CURRENCY. 


207 


this  case,  and  with  like  result  but  more  quickly  :  there  is  no 
general  rise  of  prices,  but  a  rise  of  necessaries  and  fall  of 
goods  manufactured  by  the  borrower  :  the  loss  is  local  and 
personal. 

But  says  the  banker.  Suppose  all  manufacturers  and  most 
merchants,  instead  of  A.,  B.,  &  C.  only,  to  obtain  and  pay  in- 
terest, as  did  A.,  B.,  &  C,  for  such  guaranties.  Then,  I  reply, 
they  are  all  compelled  to  stop  sooner  than  A.,  B.,  &  C.  were 
before,  when  A.,  B.,  &  C.  alone  bought  banker's  guaranties, 
because  the  credit  purchases  of  all  manufacturers  will  now 
raise  the  price  of  necessaries  sooner  than  those  of  only  three, 
and  be  more  effective  in  preventing  a  glut  through  the  over- 
stock of  A.,  B.,  &  C.  than  if  the  latter  had  acted  alone. 
Therefore,  if  a  glut,  more  properly  an  overstock,  occurs  in 
a  large  portion  of  manufactured  goods,  if  not  indeed  all, 
including  in  manufactures  what  plain  facts  without  any 
theories  require  us  to  include, —  that  is  to  say  an  overstock  of 
all  goods  for  wear,  iron  and  railroad  materials,  houses,  and 
the  material  for  construction  of  houses  etc.,  —  it  is  impossible 
that  it  could  ever  have  occurred  through  credit  alone,  be- 
cause the  natural  law,  as  I  may  well  call  it,  of  demand  and 
supply,  or  more  properly  the  impossibility  of  making  the 
exchanges  necessary  to  support  life  after  all  the  working 
capital,  no  matter  how  highly  guarantied,  has  been  converted 
into  overstock,  renders  a  general  overstock  or  glut  of  man- 
ufactures (of  absolute  necessaries  there  never  can  be  an  over- 
stock) impossible.  Absolute  necessaries  can  never  be  over- 
produced; and  for  that  reason,  and  that  only,  relative, 
necessaries  can  never,  as  a  whole  and  on  the  average,  be  over- 
produced ;  and  because  they  cannot,  it  is  impossible  for 
mere  credit,  even  all  the  credit  in  the  world,  to  bring  on  a 
banking  and  industrial  crisis  through  the  unproductive  in- 
vestment of  labor,  raw  material,  tools,  or  anything  else,  as 
is  commonly  asserted  and  believed :  it  is,  by  the  clearest 
demonstration,  impossible. 


208 


POLITICAL  ECONOMY. 


THE  MANNEE  IN  WHICH  CREDIT  TEMPORARILY  CHECKS  THE 
OPERATION  OF  THE  WELL  ESTABLISHED  LAW,  THAT 
THERE  CAN  BE  NO  EXCESS  OF  PRODUCTION,  BY  FAILURE 
TO  MAINTAIN  PURCHASING  POWER. 

It  is  impossible,  then,  as  before  shown,  for  the  credit  of 
one  man,  or  even  of  all  men  combined  for  that  purpose,  to 
raise  all  prices.  The  utmost  that  can  be  done  upon  credit 
is  to  raise  the  price  of  what  one  buys  and  lower  thereby 
the  price  of  what  he  sells,  and  this  can  never  be  carried  so  far 
as  to  create  a  crisis.  But  says  the  banker  before  alluded 
to.  Do  not  the  highest  authorities  say  that  a  bill  of  exchange, 
which  is  a  mere  credit,  a  check,  which  is  a  mere  credit,  a 
promissory  note,  which  is  a  mere  credit,  deposits  in  savings 
banks  and  with  private  individuals,  which  are  mere  credits, 
even  commercial  deposits,  which  are  mere  credits,  and  in 
short  all  credit  whatever  (it  may  be  called  debt,  if  you  like), 
take  the  place  largely  of  money  ;  and  by  so  doing  raise  prices 
and  cause  unproductive  investments  ;  and  by  those  unpro- 
ductive investments,  and  the  values  sunk  therein,  bring  on 
banking  and  industrial  crises? 

This  is  the  same  old  question,  good  banker,  repeated  with 
some  variation.  You  now  affirm  definitely  that  unproductive 
investment  and  crises  come  from  credit,  that  is  to  say,  an 
excess  of  credit ;  but  I  have  clearly  demonstrated  to  you  the 
fact  that  there  can  be  no  such  unproductive  investment,  and 
that  it  is  an  absolute  impossibility,  because  mere  credit  acts 
in  two  directions,  —  on  the  commodities  bought  as  well  as 
those  produced  by  means  of  the  credit ;  and  if  an  unproduc- 
tive investment  occurs  it  is  unproductive  because  the  pro- 
ducer cannot  sell.  The  credit  raises  what  he  buys,  or  what 
he  and  his  laborers  have  to  buy,  and  depresses  what  they 
have  to  sell ;  and,  like  a  candle  burning  at  both  ends,  un- 
productive investments  must  under  these  circumstances  be 
short  lived.  Nevertheless,  unproductive  investments  (they 
are  so  called,  but  they  are,  while  productive  in  whole  or  part 
to  the  producers,  not  so  much  so  to  the  nation)  do  occur,  and 
crises  result ;  but  if  the  reasons  given  are  sound,  credit  alone 


KEDEMPTION  OF  CURRENCY. 


209 


is  not  the  cause ;  and  yet  the  crisis  comes  through  banks 
which  have  only  a  debt  against  themselves  to  give  to  the  pro- 
ducers in  exchange  for  producers'  debt.  Here  is  a  manifest 
contradiction  :  Can  it  be  explained  ?  says  the  banker.  There 
is  but  one  explanation  possible,  say  I,  and  that  is  that  the 
credit  given  by  the  banker  circulates  as  cash  in  the  shape  of 
bank-notes,  to  pay  labor  and  small  producers  ;  and  the  trans- 
fers of  credit  are  usually  sufficient  without  handling  notes  or 
gold  in  large  transactions.  These  payments  are  called  set- 
offs of  credit  against  debt  by  these  writers  and  you,  and 
nothing  more ;  and  here  lurks  the  fallacy  which  deceives  the 
understanding :  it  is  taken  for  granted  that  this  credit,  with- 
out being  first  converted  into  money,  raises  general  prices^ 
if  they  are  raised  at  all. 

But  says  the  banker.  Are  not  bills  of  exchange,  checksi, 
etc.,  money  quite  as  much  as  mere  bank  credit  ?  Is  not  wheat, 
sent  from  Chicago  to  New  York,  sold  for  bills  of  exchange  ? 
Is  not  the  same  wheat,  when  shipped  to  London  or  Liverpool, 
sold  mostly  for  bills  of  exchange  running  days  or  months  ? 
Are  not  these  bills  indorsed  from  holder  to  holder  ;  and  possi- 
bly, if  the  acceptors  are  strong,  transferred  from  hand  to 
hand  until  they  are  used  to  purchase  English  goods  in  ex- 
change for  the  wheat?  Is  it  not  so,  also,  with  cotton  as  well 
as  wheat  ?  Be  it  so,  say  I ;  if  bills  of  exchange  were  or  possi- 
bly could  be  used  as  money  in  the  general  markets  where 
consumers  are  buying  in  order  to  eat,  drink,  wear,  find  shelter, 
comforts,  or  luxuries,  they  would,  to  the  extent  of  their  vol- 
ume, undoubtedly  raise  prices  in  money  ;  but  they  are  not  so 
used,  and  where  they  are  actually  used  as  intermediate  ex- 
changes, in  order  to  produce  the  final  exchanges  of  American 
for  English  and  colonial  productions,  it  only  saves  a  few  days' 
time ;  that  is  to  say,  it  makes  personal  credit,  for  a  short  time, 
take  the  place  of  banker's  credit :  the  bill  is  either  discounted 
before  due,  or  when  due  is  paid  or  redeemed  with  banker's 
credit,  mostly  borrowed  ;  so  that  this  credit,  in  the  shape  of  a 
bill  of  exchange,  stands  upon  bank  credit  at  last :  the  acceptor 
can  only  pay  with  money  or  bank  credit,  which  is  also  a 
power  to  circulate  money  in  the  reserve  :  he  must  exchange  his 

14 


210 


POLITICAL  ECONOMY. 


personal  credit  for  bank  credit.  This  is  the  exchange  of  some- 
thing which  has  no  power  to  circulate  money  for  a  credit  in 
bank  which  has.  The  method  would  be  the  same  were  there 
no  banks  and  no  money  but  gold  and  silver  ;  the  bill  of  ex- 
change does  not  take  the  place  of  one  dollar,  pound,  or  franc 
in  money :  it  only  saves  carrying  money  backwards  and  for- 
wards, to  and  from  commercial  centres  :  it  is,  in  short,  clearing 
or  set-off  of  debts  to  save  the  carriage  of  money  without  any 
diminution  of  the  number  of  payments.  So  the  check  is  in 
like  manner  but  an  instrument  of  payment  by  gold,  silver, 
bank-notes,  or  bank-credits  —  the  power  to  put  these  in  cir- 
culation :  it  cannot  put  in  circulation  one  dollar  more  than 
would  be  circulated  were  there  no  checks,  nor  can  it  put  in 
circulation  one  dollar  less.  Personal  credits  undoubtedly 
cause  goods  to  be  bought  at  certain  times  and  places  which 
otherwise  would  not  be  then  and  there  bought ;  but  on  the 
whole  they  cause  less  goods  to  be  sold,  because  they  act  di- 
rectly on  the  prices  of  the  goods  sold,  and  so  curtail  the  pur- 
chasing power  of  the  buyers.  Moreover,  as  I  have  seen  and 
can  testify,  individual  promissory  notes  and  state  scrip  (such 
as  was  issued  by  the  State  of  Indiana  in  1840-41  and  after- 
wards) may  be  used  in  regions  far  from  markets  as  a  sort  of 
home  currency  of  very  limited  circulation  ;  but  the  use  is  only 
temporary  and  limited.  Again,  the  debts  due  by  individuals, 
savings  banks,  and  some  private  bankers,  are  to  be  excluded, 
for  the  most  part,  from  the  category  of  money,  because  the 
debts  are  not  used  as  money.  The. debts  due  by  private  in- 
dividuals for  money  deposited  with  them  are  sometimes  debts 
due  from  loan  agents  who  guaranty  the  loans,  and,  so  far  as 
it  may  be  otherwise,  the  debts  due  by  such  persons  are  largely 
represented  by  deposits  in  banks  ;  so  that  the  only  credit 
money  thus  arising  appears  in  regular  deposits ;  and  if  these 
are  loaned  in  notes  or  gold,  it  is  only  doing  what  the  deposit- 
ors might  have  done  themselves.  So  private  bankers  in  large 
cities  have  their  own,  and  therefore  their  depositors'  credits 
in  regular  banks^  which  clear  for  the  private  bankers  and  thus 
for  their  customers.  The  funds  of  the  savings  banks  are 
mostly  in  loan  at  long  dates,  or  in  government  or  corporation 


EEDEMPTION  OF  CURRENCY. 


211 


debt.  They  are  most  potent  auxiliaries,  however,  in  causing 
overstock,  by  receiving  bank-notes  and  checks,  but  mostly 
bank-notes  left  on  deposit  by  laborers  out  of  savings.  The 
constant  deposit  and  redeposit  of  notes,  placed  through  sav- 
ings banks  in  the  vaults  of  commercial  banks  by  deposit,  can 
be  loaned  and  reloaned  to  pay  for  labor,  or  labor  and  raw 
material,  over  and  over  again,  while  mercantile  credits  granted 
by  commercial  banks  sustain  prices,  and  thus  increase  the 
quantity  of  the  overstock.  Therefore,  instead  of  the  effect- 
ive total  of  deposits  being  more  than  the  total  of  notes  and 
gold  that  would  take  their  place  were  there  no  deposits,  the 
total  is  probably  less.  No  bank  credit,  aside  from  the  re- 
serve, is  a  substitute  for,  but  only  a  power  to  put,  money  in 
circulation. 

But  how  do  bank  loans  necessarily  cause  overstock,  ad- 
mitting that  an  overstock  or  glut  can  arise  ?  says  the  banker. 
Are  not  loans  made  to  other  people  than  producers  ?  Every 
man,  I  reply,  who  buys  and  sells  at  all,  is  personally  or 
representatively  both  producer  and  consumer,  —  a  producer 
when  he  sells,  a  consumer  when  he  buys  for  cash.  A  mer- 
chant who  buys  for  cash,  without  bank  loan,  enables  a  manu- 
facturer to  produce  something  to  take  the  place  of  what  he 
has  bought ;  a  manufacturer  who  borrows  money  expends  it 
in  raw  material  and  labor,  and  increases  production  to  that 
extent,  but  does  not  balance  his  production  by  consumption, 
and  so  far  deranges  the  exchanges.  A  merchant  who  borrows 
from  banks  and  buys  from  the  factor  or  commission  merchant 
of  the  manufacturer  or  other  producer,  does,  representatively 
(that  is  to  say,  as  the  representative  of  the  manufacturer),  the 
same  thing  ;  he  produces,  but  does  not  balance  his  produc- 
tion by  consumption,  while  all  or  nearly  all  other  buyers  are 
equally  consumers.  Hence  all  bank  loans,  unless  in  cases  of 
swindling  or  mistake,  or  to  supply  immediate  wants  by 
anticipation  of  income,  are  loans  to  producers.  If  they  sell, 
the  loans  are  paid ;  if  not,  unpaid  ;  and  the  degree  of  ex- 
cess of  overstock  appears  clearly  by  the  volume  of  deposits 
above  reserve  in  commercial  hanks.  You,  my  good  banker, 
and  those  writers  whom  you  depend  upon,  admit  that  un- 


212 


POLITICAL  ECONOMY. 


productive  investments  and  values  sunk  in  the  payments 
made  for  necessaries,  the  raw  material,  the  iron  and  iron 
rails,  wood,  labor,  etc.,  that  have  produced  railroads,  mills, 
commercial  and  dwelling  houses,  town  and  city  improve- 
ments made  at  enormously  expensive  rates,  come  from  bank 
loans.  Now  if  that  imperative  law  which  renders  over- 
production impossible,  demonstrated  so  clearly  by  the  great 
scientist,  J.  B.  Say,  be  admitted,  as  you  do  and  must  admit 
it,  how  do  you  account  for  all  this  excessive  production,  un- 
productive, as  you  assert,  but  nevertheless  only  partially  so, 
and  chiefly  so  through  excess,  and  excess  only  ?  This  ex- 
cess, which  led  to  a  crisis,  took  some  years  to  accumulate, 
and  it  has  taken  place  in  spite  of  M.  Say's  demonstration.  It 
can  be  accounted  for  only  in  one  way.  M.  Say's  demonstra- 
tion is  sound  only  upon  the  most  abstract  (that  is  to  say,  the 
most  general)  principles,  but  it  is  not  placed  upon  the  light 
grounds.  His  proposition  is  relatively  true,  but  not  demon- 
strated to  be  true  in  that  sense.  A  more  special  demonstra- 
tion is  required  to  make  it  practically  useful  to  you.  The 
plain  fact  is,  that  the  absolute  necessaries  of  life  can  never 
be  overproduced.  Population  throughout  the  commercial 
world  is  always  abreast  of  the  production  of  absolute  neces- 
saries, and  necessaries  relative  to  civilization  cannot  be  pro- 
duced in  excess  on  the  average^  for  that  reason,  and  for  that 
only ;  and  personal  credit  is  unequal  to  the  task  of  carrying 
any  excess  to  a  point  in  the  neighborhood  of  a  crisis.  There- 
fore, the  excess  of  unproductive  or  partially  unproductive 
investment,  whichever  you  may  prefer  to  call  it,  can  only 
aiise  from  the  excess  of  loans  expended  in  producing  these 
unproductive  investments.  This  excess  in  the  shape  of  money 
units,  whether  of  bank-notes  or  gold,  or  what  for  the  conven- 
ience of  the  borrower  alone  takes  the  place  of  notes  and  gold, 
—  bank  credit,  causes  (as  each  loan  is  expended  on  raw 
material  of  railroads,  cloth,  etc.)  a  rise  of  prices  for  every- 
thing in  the  market,  including  the  things  produced,  which 
more  than  balances  the  natural  decline  of  price  in  the  ar- 
ticles produced,  as  I  have  plainly  demonstrated,  and  in  this 
way  the  producers  make  money,  up  to  the  time  of  the  crisis, 


REDEMPTION  OF  CURRENCY. 


213 


on  all  they  sell^  notwithstanding  the  law  of  natural  depre- 
ciation ;  but  the  inevitable  law  before  demonstrated  must 
assert  itself  at  last  through  the  banking  and  industrial  crisis, 
and,  in  spite  of  all  this  increase  of  money,  production  is  set 
back  not  only  to  a  level  with,  but  below,  the  rate  of  con- 
sumption, and  on  the  average  the  law  is  maintained. 

THE  THREE  FALLACIES  ON  WHICH  THE  CREDIT  THEORY, 
IN  OPPOSITION  TO  THE  MONEY  THEORY  OF  BANKING, 
ARE  FOUNDED. 

The  manner  in  which  temporary  excess  of  unproductive 
consumption,  causing  crises,  as  in  point  of  science  it  is  erro- 
neously called,  takes  place,  has  been  shown  ;  but  our  banker 
cannot  yet  see  clearly  how  the  excess  can  come  from  any- 
thing but  ordinary  credit,  and  he  thinks  "  specie  payments  " 
would  be  a  sufficient  check  at  all  events.  He  thinks,  and 
correctly,  that  the  enormous  expenses  of  living,  even  in 
a  way  to  which  they  have  been  accustomed,  has  begun  to 
tell  upon  native  population  in  some  places.  Nevertheless, 
our  banker  is  not  yet  willing  to  admit  that  he  is  dealing  in 
anything  but  credits  like  those  on  merchants'  books,  which 
certainly  are  not  money.  I  offer  him  this  further  demon- 
stration :  had  production  of  iron,  cloth,  lumber,  raw  mate- 
rials of  all  kinds,  etc.,  in  excess  of  agricultural  production 
devoted  to  necessaries,  been  impossible,  there  never  could 
have  been  an  excess  of  notes  and  credits  in  the  character  of 
money,  even  if  producers,  and  merchants  who  are  also  sub- 
ordinately  producers,  had  issued  their  own  small  and  large 
notes,  and  used  mutual  credits.  There  would  have  been  few 
failures,  because  prices  would  have  been  steady  ;  but  such  a 
currency  would  be  impossible  through  the  difficulty  of  set-off 
or  clearing,  —  that  is  to  say,  in  other  words,  because  it  could 
not  be  conveniently  redeemed.  Therefore,  the  excess  of 
money  referred  to,  caused  by  relative  overproduction,  is  the 
cause  of  high  and  advancing  prices,  and  there  are  three  fal- 
lacies which  veil  the  fact  from  the  eyes  of  the  understand- 
ing :  first,  the  impression  that  labor  is  the  measure  of  values ; 
secondly,  that  nothing  can  be  money  unless  it  has  intrinsic 


214 


POLITICAL  ECONOMY. 


value,  like  gold  and  silver ;  thirdly,  the  resulting  impression 
that  the  money  unit  being  only  gold  and  silver  possessed  of 
intrinsic  value,  paper  and  credit  units,  although  always  pay- 
ing on  a  par  with  gold,  are  merely  credits,  and  not  money  ; 
forgetting  that  all  that  pays  absolutely  is  money  as  well  as 
credit,  and  all  that  is  taken  with  the  right  of  recourse  on 
the  payer,  or  somebody  else  rather  than  a  banker,  is  credit 
only. 

These  three  fallacies  are  at  the  bottom  of  the  mercantile 
theory  of  intrinsic  value  in  money.  Thus  the  fallacy  of  in- 
trinsic value,  while  it  has  the  most  conservative  effect  in  keep- 
ing in  reserve,  and  comparatively  out  of  circulation,  large 
hoards  of  treasure,  which  if  freely  loaned  to  producers  to  ex- 
pend on  labor  and  raw  material  would  cause  an  enormous 
rise  of  general  prices,  is  thus  demonstrated  with  almost  math- 
ematical certainty.  This  fallacy  h^s  operated,  and  always 
will,  more  or  less,  to  make  men  instinctively  take  it  for 
granted  that  what  is  really  intrinsic  utility  as  a  commodity^ 
and  nothing  else,  is  really  intrinsic  value  as  money.  The 
same  fallacy  has  had,  has  now,  and  always  will  have  more  or 
less,  the  effect  of  keeping  out  of  circulation  vast  treasures  of 
coin  and  bullion,  while  paper  money,  which  possesses  no  in- 
trinsic utility  as  a  commodity  worth  preserving,  while  it  pos- 
sesses the  same  extrinsic  value  as  gold  (for  all  values  are  ex- 
trinsic), is  more  freely  put  in  circulation,  and  retires  the  gold, 
which  is  a  second  and  still  more  important  and  useful  effect 
of  the  fallacy.  Thus  this  fallacy  had  the  excellent  effect  in 
France,  a  few  years  since,  of  retiring  an  enormous  mass  of 
treasure  —  perhaps  twelve  hundred  millions  of  dollars  —  and 
replacing  it  with  paper :  the  conservative  instinct  of  the  peo- 
ple remained  after  the  issue  of  the  paper;  production  was 
not  stimulated  essentially  by  loans ;  the  people,  anxious  to 
invest  the  paper  advantageously,  emulated  each  other  in  the 
purchase  of  the  government  debt ;  and  the  whole  force  of 
price-expansion,  latent  in  the  paper,  was  beneficently  ex- 
pended upon  rentes,  which  were  all  called  home  from  abroad, 
while  the  expansion  of  circulation,  through  expanded  produc- 
tion in  Germany,  stimulated,  if  not  almost  wholly  created, 


REDEMPTION  OF  CURRENCY. 


216 


by  the  French  indemnity,  caused  more  loss  to  Germany  than 
gain.  The  same  effect  was  manifest  in  the  United  States  in 
1857,  as  before  remarked,  by  the  almost  complete  retirement 
of  one  hundred  millions  of  gold,  in  consequence  of  a  vicious 
currency,  and  a  result  similar  to  that  in  France  was  rendered 
impossible  in  the  United  States  since  the  commencement  of 
the  civil  war,  in  1861,  up  to  this  time,  in  1877,  through  the 
causes  already  named. 

THE  MONEY  UNIT,  WHETHER  DESIGNATED  BY  A  GIVEN 
WEIGHT  OR  JMEASURE,  OR  BY  A  NAME  WHICH  DOES 
NOT  REFER  TO  WEIGHT  OR  MEASURE,  IS  IDEAL  ONLY. 

From  the  foregoing  demonstration  it  is  certain  that  the 
money  unit,  by  whatever  name  it  may  be  called,  even  when 
its  existence  is  demonstrated  by  the  production  of  a  gold  or  sil- 
ver dollar,  a  gold  sovereign,  a  twenty  franc,  or  a  twenty  marc 
piece,  has  no  intrinsic  value  whatever ;  and  even  the  intrinsic 
utility  possessed  by  the  gold  must  be  rigorously  excluded  if 
we  mean  to  talk  about  the  science  of  money  and  exchanges 
and  the  principles  upon  which  steady  purchasing  power  can 
be  guarantied.  Its  value  is  extrinsic,  and  consists  in  the 
power  to  obtain  in  exchange  for  it  a  certain  number  of  units 
of  weight  or  measure  in  whatever  is  to  be  sold  for  consump- 
tion ;  in  other  words,  for  use ;  and  still  in  other  words,  for 
cash:  the  number  of  the  units  of  weight  and  measure,  it 
must  not  be  forgotten,  vary  least  on  the  average  in  articles  of 
absolute,  most  in  articles  of  relative  necessity ;  and  the  de- 
grees of  variation  in  the  latter  are  indefinitely  large,  because 
they  cover  necessaries  approximating  but  not  meeting  the  ab- 
solute ;  and  they  include  luxuries  and  services.  It  requires 
considerable  time  to  produce  much  change  in  their  real  pro- 
portions, because  great  changes  of  production,  and  therefore 
of  wealth,  require  considerable  periods.  Great  changes,  tak- 
ing place  in  short  periods,  can  only  come  from  apparent  and 
not  real  wealth,  demonstrated  fictitiously  through  rise  of 
prices,  by  the  increase  of  money  units.  Any  increase  of 
money  units,  in  whatever  shape,  in  the  hands  of  buyers,  car- 
ried into  their  hands  by  laborers  and  sellers  of  raw  material, 


216 


POLITICAL  ECONOMY. 


where  the  product  has  gone  into  overstock  because  it  will 
not  sell,  has  decreased  by  consumption  the  units  of  days' 
or  months'  labor,  the  units  of  pounds  of  raw  material,  and 
the  units  of  weight  of  wheat  and  provisions;  and  so  on  in- 
definitely, while  it  has  placed  the  product  in  overstock,  and 
at  the  same  time  increased  the  units  which  go  to  make  price. 

THE  PEICE  OF  MONEY  IS  MEASURED  BY  UNITS  OF  WEIGHT, 
MEASURE,  AND  TIME,  IN  COMMODITIES  AND  LABOR  OR 
SERVICES. 

All  values  imply  number,  and  must  be  measured,  there- 
fore, by  units.  These  units  must  necessarily  be  more  or  less 
abstract  and  ideal,  because  savages  can  count  to  but  a  very 
limited  extent ;  in  fact,  only  to  the  extent  required  to  make 
their  limited  exchanges.  When  gold  and  silver  were  first 
used  as  money,  units  of  weight  became  essential,  and  the 
units  of  money  and  the  units  of  commo'dities  were  neces- 
sarily more  or  less  ideal :  although  units  of  days'  labor  in  one 
commodity  might  have  been  previously,  in  the  absence  of  all 
other  means  of  exchange,  exchanged,  perhaps,  for  units  of 
days'  labor  in  another  :  all  numbers,  that  is  to  say,  all  units, 
are  ideal,  because  they  can  be  predicated  of  all  things,  and 
the  numbers  are  therefore  abstract.  When  applied  to  definite 
objects  they  are  abstract  more  or  less :  even  when  definitely 
applied,  the  intrinsic  qualities  of  the  things  numbered  do  not 
enter  materially  into  the  account,  except  so  far  as  there  is 
actual  utility  in  the  things  to  supply  some  want.  Ideal  goods 
undoubtedly  do  not  admit  of  sale,  but  if  goods  not  yet  pro- 
duced were  contracted  and  paid  for,  and  the  contracts  placed 
in  market,  prices  would  be  accordingly  affected.  The  non- 
delivery through  non-production  of  the  goods  would  restore 
the  equilibrium  of  prices,  because  goods  are  wanted  only  for 
consumption ;  but  a  paper  or  credit  dollar  is  redeemed  in- 
definitely by  other  paper  or  credit  dollars,  or  by  a  gold  dollar ; 
and  a  gold  dollar  is  redeemed,  that  is  to  say,  exchanged  for  a 
paper  or  credit  dollar  indefinitely,  for  all  redemptions  of 
money  are  but  exchanges.  Money  can  only  be  redeemed 
by  other  money  even  when  the  redemption  is  on  a  national 


KEDEMPTION  OF  CURRENCY. 


217 


or  world's  scale ;  and  it  can  only  be  redeemed  by  money 
on  a  local  scale.  Hence  the  money  unit  is  wholly  that  of  the 
commodity  partially  ideal,  and  sufficiently  so  to  make  not 
only  the  number  of  units  of  weight  and  measure  actually 
on  hand,  but  also  those  guarantied  to  be  shortly  on  hand, 
determine  the  price  of  money  in  those  units. 

LOCAL  REDEMPTION  OF  MONEY. 

The  local  redemption  of  money  is,  even  if  we  speak  with 
rigorous  accuracy,  conducted  upon  the  same  principle  as  the 
national  or  universal  redemption  (for  the  whole  commercial 
world)  was  accomplished.  If  a  bank  retires  from  business 
and  winds  up,  the  notes  and  credits  issued  are  redeemed  by 
those  of  other  banks,  which  take  their  place :  if  a  new  bank 
is  established,  it  either  increases  the  number  of  money  units 
or  merely  issues  enough  to  take  the  place  of  those  retired  by- 
retiring  banks.  Gold  in  one  place  is  redeemed  by  gold  in 
another  place,  where  there  are  no  banks,  by  the  instrumental- 
ity of  a  bill  of  exchange. 

But  says  our  banker  before  alluded  to.  You  say  gold  in  one 
place  is  redeemed,  that  is  to  say  exchanged,  for  gold  in  an- 
other, and  therefore  gold  can  only  be  redeemed  by  itself  ;  but 
all  paper  and  credit  money  are  redeemed  by  gold  only.  In 
that  assertion,  my  good  banker,  say  I,  you  are  wholly  mis- 
taken :  commerce  is  the  carrying  from  all  producers  to  all 
consumers  of  what  can  be  consumed,  through  the  exchanges 
of  those  things  producers  cannot  consume  themselves :  the 
commercial  clearings  at  commercial  centres  are  the  sums  of 
the  things  sold  and  consumed  within  the  commercial  limits  of 
those  centres  except  the  sales  of  overstock,  which  result  only 
in  changing  bank  debtors ;  and  as  London  is  the  greatest 
centre  of  international  commerce,  the  clearings  must  cover 
immense  sums  of  raw  produce  and  manufactures  exchanged 
with  many  parts  of  the  world  other  than  Great  Britain.  But 
the  purchase  of  that  produce  and  those  manufactures,  if  they 
come  from  outside  the  kingdom,  require  an  exchange  of  Brit- 
ish manufactures,  and  to  some  extent  perhaps  gold:  and 
what  do  the  British  manufactures  cost  ?    They  cost  gold,  or 


218 


POLITICAL  ECONOMY. 


Bank  of  England  notes  amounting  to  gold,  for  labor,  and 
they  cost  British  goods  for  raw  material,  which  is  paid  for 
in  British  goods  again ;  and  these  British  goods  cost  labor 
again,  paid  for  in  gold. 

Again,  the  British  goods  sold  in  the  home  market  are 
paid  for  mostly  in  gold  and  Bank  of  England  notes ;  in 
short,  the  London  clearings,  after  deducting  sales  of  over- 
stock, are  on  the  commercial  side  made  up  through  goods 
consumed  at  home  or  sent  for  consumption  abroad,  and  are 
on  the  money  side  made  up  in  their  origin,  so  far  as  home 
consumption  is  concerned,  partly  of  money  transactions  out- 
side of  banks ;  that  is  to  say,  of  gold  and  Bank  of  England 
notes  paid  out  and  afterwards  deposited.  These  clearings 
largely  constitute  the  redemption  of  gold  and  Bank  of  Eng- 
land notes  by  giving  credits  in  exchange  for  them.  But 
inasmuch  as  the  gold  deposited  for  purposes  of  redemp- 
tion in  a  common  reserve  in  the  Bank  of  England,  if  with- 
drawn by  means  of  a  check  in  consequence  of  goods  con- 
sumed, would  be  immediately  redeposited  in  the  same  or  some 
other  bank,  a  clearing  saves  all  this  unnecessary  trouble; 
and  the  result  is,  that  after  the  clearings  the  total  of  bank 
credits  is  nearly  the  same  as  at  the  commencement.  The 
final  result  is,  that  check-holders  set  off  bank  credits  against 
bank  loans,  all  of  which  results  in  retiring  bank  credits  to 
the  value  of  goods  sold  for  consumption,  so  far  as  the  mer- 
chants receiving  checks  are  in  debt  to  the  banks.  The  latter 
is  the  consummation  of  the  redemption.  The  gold  or  Bank 
of  England  notes  deposited  in  country  banks  by  dealers  are 
redeemed  by  the  transfer  of  a  credit  in  a  London  bank  given 
in  exchange  for  the  gold.  Had  gold  and  silver  without 
banks  been  the  only  money,  as  soon  as  the  goods  were  sold 
for  consumption,  gold  for  a  corresponding  amount  would  be 
handed  to  producers  and  capitalists,  and  the  last  and  final 
act  of  circulation  by  gold  would  take  place  by  returning  it 
back  to  the  producers  and  capitalists,  who  had  originally  put 
it  in  circulation,  — the  former  for  labor  and  raw  material,  and 
the  latter  by  loan.  Precisely  so  in  the  London  banks  ;  the 
last  act  of  circulation  is  accomplished  by  retiring  and  can- 


KEDEMPTION  OF  CURRENCY. 


219 


celing  bank  credits,  instead  of  a  like  amount  of  bank-notes, 
through  the  merchants  who  set  off  their  debts  to  the  banks, 
which  have  been  the  means  of  creating  bank  credits,  by 
handing  into  the  banks  a  Hke  amount  of  credit  transferred 
to  them  through  the  instrumentality  of  checks.  The  bank 
book  transfers  are  not  the  payments,  but  registry  of  the  pay- 
ments. Thus  a  change  of  bank  credits  from  A.  to  B.  is  only 
the  registry  of  the  movement  of  gold  in  the  reserve  from  A. 
to  B.,  and  a  loan  to  C,  which  increases  the  total  of  deposits, 
is  a  power  to  put  so  much  more  gold  in  circulation.  Bank 
credit  takes  the  place  of  a  like  amount  of  bank-notes  or  gold 
by  empowering  the  holder  of  the  credit  to  circulate  just  as 
much  gold  as  he  could  if  his  credit  were  all  gold.  Hence  it 
appears  very  clearly  that  the  founders  of  the  Bank  of  Eng- 
land, instead  of  establishing  a  bank  whose  notes  vary  or  cir- 
culate as  gold  in  the  commercial  world  naturally  varies  or 
circulates,  established  one  whose  notes  (gold)  vary  as  bank 
credit  varies.  They  were  deceived  by  the  fallacy  of  the  mer- 
cantile theory  of  intrinsic  value  :  they  supposed  that  gold 
coin  was  a  standard,  instead  of  being  only  the  ideal  money 
unit  embodied  in  gold  ;  and  that  gold  being  the  standard,  all 
currency  not  worth  as  much  as  gold  must  depreciate  and  go 
below  gold.  They  did  not  perceive  that  gold  might,  through 
artificially  increased  circulation,  depreciate ;  and  that  the  de- 
preciation could  only  be  marked  by  its  exchangeable  value 
reckoned  in  units  of  commodities.  They  were  deceived 
quite  as  much  as  mariners  who,  supposing  that  they  are  esti- 
mating their  distance  from  a  fixed  object  on  shore,  are  esti- 
mating it  from  an  object  moving  like  themselves. 

The  American  banking  system  in  1857  was  like  the  Eng- 
lish system  before  1844,  but  with  more  weak  banks.  The 
multitude  of  banks  redeemed,  as  the  banks  do  now,  for  each 
other.  It  sounds  strangely  to  say  that  bank-notes  are  re- 
deemed in  the  sense  of  the  true  object  of  all  redemptions, 
under  an  inconvertible  currency,  as  regularly  as  under  a  con- 
vertible ;  but  such  is  incontestably  the  fact ;  and  with  com- 
paratively few  exceptions,  occurring  under  what  is  called 
"  Specie  Payments,"  there  has  been  but  little  more  gold  act- 


220 


POLITICAL  ECONOMY. 


ually  circulated  from  hand  to  hand  under  convertible  than 
under  inconvertible  currency  in  the  United  States.  All 
banks  redeem  for  all  other  banks  by  receiving  all  current 
bank-notes  on  deposit.  These  notes  have  been  paid  out  by 
buyers  for  purposes  of  exchange  leading  to  consumption, 
and  are  sent  into  deposit  by  dealers  who,  in  exchange  for 
the  deposit,  take  the  drafts  or  checks  of  the  receiving  banks, 
on  banks  in  the  clearing  or  commercial  centres,  and  who, 
first  or  last,  use  them,  by  extinguishing  or  canceling  the 
bank  credit  represented  by  the  check,  in  taking  up  their 
own  discounted  notes  and  bills  of  exchange.  When  the  ex- 
changes were  largely  in  favor  of  the  clearing  centres  by 
reason  of  an  excessive  and  depreciated  currency,  like  that 
of  the  free  banks  of  Indiana  and  Illinois  and  other  banks 
prior  to  1857  (the  rate  of  exchange  varying  from  one  half 
to  ten  per  cent.),  sound  banks  were  subjected  to  the  incon- 
venience of  furnishing  (exchange  to  those  who  found  it  prof- 
itable to  assort  their  notes ;  and  in  case  of  refusal  to  pay  in 
drafts  on  New  York,  they  were  required  to  pay  large  sums 
in  gold  in  exchange  for  their  own  notes,  which  had  been 
assorted  by  those  brokers  who  dealt  largely  in  exchange  — 
some  banks  keeping  reserves  of  gold  equal  to  two  thirds  of 
their  respective  capitals.  This  gold  was  not  hept  by  the 
brokers  in  exchange  :  it  was  sent  by  express  to  New  York, 
to  enlarge  the  credit  fund  to  be  drawn  against,  and  from 
time  to  time  the  same  banks  which  redeemed  in  gold  or- 
dered a  part  of  this  same  gold  back  from  New  York,  like 
the  managers  of  the  Bank  of  Ayr  in  Adam  Smith's  time 
who  bought  gold  in  London  to  redeem  their  notes  with; 
but  there  was  this  difference  :  the  managers  of  the  Bank  of 
Ayr  bought  to  sustain  their  overissues ;  these  sound  Ameri- 
can banks  bought  to  sustain  the  overissues  of  other  banks, 
as  they  were  forced  to  do,  through  the  discount  and  deposit 
system.  To  complete  the  redemption  of  the  notes  promis- 
cuously deposited,  therefore,  a  payment  in  gold  was  not 
sufficient,  but  the  exchange  of  the  gold  for  a  credit  in  New 
York,  in  order  to  balance  or  perfect  the  exchange  of  com- 
modities between  the  country  and  the  commercial  centre,  or 


REDEMPTION  OF  CURRENCY. 


221 


in  other  words  to  make  the  money  exchanges  balance,  as 
well  as  those  of  commodities.  The  gold  in  the  great  com- 
mercial centre  of  London  is  not  a  regulator  of  the  volume 
of  gold  and  Bank  of  England  notes  circulating  in  England, 
but  the  total  of  all  bank  credits  is :  on  the  other  hand,  the 
gold  in  reserve  against  credits  and  bank-notes  (for  it  all  con- 
stitutes one  fund)  in  the  United  States  is  not  the  regulator 
of  the  volume  of  notes,  but  the  volume  of  credits  is,  gold 
being  a  costly  mercantile  ballast  which  draws  no  interest, 
while  in  London  the  export  of  gold  loaned  from  the  banks 
is  an  indicator  of  a  speculative  advance  of  produce  and  raw 
material  in  the  London  markets  through  loans  to  producers, 
which  is  checked  by  the  export,  and  the  check  is  increased 
by  raising  the  rate  of  interest.  The  return  of  gold  only 
indicates  that  sales  have  taken  place  and  that  prices  have 
been  made  lower  thereby  ;  and  for  that  reason,  and  no  other, 
new  discounts  and  purchases  may  be  made.  The  only  nat- 
ural and  regular  movement  in  this  case  is  in  the  export 
and  import  of  gold ;  the  artificial  raising  of  the  rate  of  inter- 
est hastens  sales,  and  thereby  becomes  an  auxiliary,  reducing 
or  contracting  the  volume  of  bank  credit.  In  the  same  way 
gold  goes  out  to  invest  in  bills  of  exchange  or  buy  produce 
for  which  there  is  a  home  demand,  while  there  is  not  a  cor- 
responding and  equal  demand  for  British  goods.  These  latter 
are  all  healthy  and  regular  movements  of  gold  ;  but  the  fact 
to  which  I  call  attention  is,  that  gold  moves  here  as  merchan- 
dise and  not  as  money.  Moreover,  as  I  have  shown  in  the 
chapter  on  Circulation,  prices  depend  upon  the  money  in  cir- 
culation, not  upon  the  money  out  of  circulation  :  the  gold  in 
reserve  circulates  in  subordination  to  the  bank  credits  instead 
of  controlling  by  its  circulation  the  creation  of  bank  credits. 

REDEMPTION  AN  INFALLIBLE  TEST  OF  MONEY. 

The  initial  act  or  movement  of  currency,  whether  bor- 
rowed or  not,  is  a  payment  to  a  producer :  hence  all  loans 
from  capitalists  or  banks,  made  by  manufacturers  and  mer- 
chants, both  of  whom  are  producers,  are  in  excess  of  the 
money  they  furnish  themselves,  and  in  excess  of  the  money 


222 


POLITICAL  ECONOMY. 


belonging  to  the  producers  of  absolute  necessaries,  who  cul- 
tivate the  earth  and  make  no  such  loans.  The  loans  of  the 
latter,  by  way  of  mortgage,  are  an  assignment  of  net  proiSts 
to  an  amount  sufficient  to  cover  the  mortgage  ;  and  if  there  be 
not  enough,  then  of  the  land  itself :  hence,  all  bank  loans,  un- 
paid, demonstrate  production  not  yet  balanced  by  consump- 
tion ;  or,  in  other  words,  by  sales  for  cash :  the  last  movement 
or  act  of  circulation  of  the  money  loaned  is  a  payment  back 
by  a  class  of  producers  other  than  the  first,  and  who  have 
made  sales  of  their  own  productions,  of  an  equal  amount  of 
money,  for  the  amount  thus  paid  out  at  first ;  whereby  also 
the  borrowers  obtain  funds  to  pay  their  loans.  This  return 
movement  of  money  out  of  circulation,  resulting  from  goods 
bought  for  consumption,  gives  rise  to  a  considerable  redemp- 
tion of  the  money  thus  returned  by  means  of  deposits  of  the 
money  in  banks  and  resulting  checks  on  commercial  centres. 
But  says  our  banker.  How  can  anything  be  redeemed  unless 
by  something  better  than  itself:  and  is  not  a  bill  of  ex- 
change always  redeemed  by  something  better  ?  Yes,  say  I ; 
but  I  have  shown  that  even  gold  and  Bank  of  England 
notes  are  redeemed  by  movements  of  other  gold  in  a  reserve, 
and  as  a  result  canceling  or  setting  off  bank  credit  against 
debt  due  to  a  bank ;  and  the  credit  is  better  to  the  merchant 
than  the  gold,  because  it  is  a  power  to  move  gold  without 
the  burden  of  keeping  it.  A  bill  of  exchange  is  never  re- 
deemed by  a  bill  of  exchange,  but  by  bank-notes,  bank 
credit,  or  gold ;  and  these  three  are  on  a  par  so  long  as  they 
are  mutually  convertible.  If  bills  of  exchange  are  really 
on  a  par  with  bank-notes  and  credits,  they  can  certainly  be 
redeemed  by  bills  of  exchange  indefinitely,  which  is  absurd, 
and  impossible  as  well  as  absurd,  because  the  bills  of  ex- 
change must  be  discounted  before  payment  in  full  can  take 
place.  Fictitious  bills  of  exchange  and  bills  given  in  re- 
newal, because  sales  of  things  produced  by  means  of  the 
loans  on  these  bills  cannot  be  sold,  are  not  redeemed  but 
renewed :  money  can  only  be  redeemed  by  itself :  redemp- 
tion is  only  an  exchange  of  currency.  Could  sales  be  made 
by  the  drawers  and  acceptors  of  the  bills,  they  would  be 


REDEMPTION  OF  CURRENCY. 


223 


made,  undoubtedly ;  to  imagine  that  tariffs,  taxes,  great  im-  - 
provements  in  machinery,  and  making  less  laborers  neces- 
sary, are,  singly  or  collectively,  the  cause  of  creating  the  glut 
of  manufactured  goods,  of  iron,  of  iron  rails,  chairs  and 
spikes,  of  lumber  and  materials  for  rolling  stock,  of  locomo- 
tives, cars,  and  railroads,  that  are  not  worth  the  cost,  of 
warehouses,  stores,  and  dwelling-houses,  without  the  aid  of 
bank  loans,  is  to  put  the  temporary  for  the  permanent,  the 
accidental  for  the  certain,  post-auxiliary  for  first  causes. 
These  temporary  and  auxiliary  causes,  or,  more  properly,  aids 
in  bringing  about  the  production  of  things  only  relatively 
necessary,  in  excess  of  those  absolutely  necessary,  act  only 
in  subordination  to  the  main  cause,  which  is  an  excess  of 
circulation  through  bank  loans.  Were  there  no  such  ex- 
cess, there  could  be  no  banking  crisis,  nor  even  an  industrial 
crisis :  were  the  proceeds  of  bank  loans  in  the  shape  of-  bank- 
notes and  credits  no  more  effectual  in  raising  prices  than 
bills  of  exchange,  promissory  notes,  checks,  and  credits,  given 
on  book  by  merchants,  not  only  would  a  banking  crisis  be 
impossible,  but  an  industrial  crisis  would  also  be  impossible, 
as  I  have  already  demonstrated ;  because  all  the  bills  of  ex- 
change, notes,  and  bank  credits  in  the  world  could  never  fur- 
nish producers  and  laborers  the  necessaries  of  life  for  a  single 
year,  provided  they  were  all  the  time  producing  twice  as 
much  as  they  could  in  the  mean  time  sell.  Nothing  but  a 
power  adequate  to  raise  all  prices  alike,  in  a  progressive 
ratio,  so  as  to  make  the  last  yard  or  pound  successively  sell 
for  more  than  it  cost,  for  a  long  time,  can  possibly  accom- 
plish this  feat ;  and  the  only  power  that  can  accomplish  it 
is  money,  or  something  that  in  some  disguise  or  under  some 
mask  or  other  performs  the  office  of  money.  That  office 
is  to  pay  down  without  recourse  upon  the  buyer  or  any 
one  else  but  a  banker  who  issues,  or  a  government  that 
demonetizes ;  and  that  recourse  is  only  a  legal  demand  upon 
the  banker  to  exchange  the  bank-note  or  credit  for  gold  if 
the  holder  desire,  or,  as  usually  happens,  for  a  bill  of  ex- 
change, check,  or  draft,. to  transfer  —  what?  Other  bills  of 
exchange,  checks,  or  drafts  in  payment  of  the  surrendered 


224 


POLITICAL  ECONOMY. 


and  canceled  bank-notes  and  credits  ?  No !  but  to  transfer 
to  the  holder  or  his  order  like  notes  or  credits ;  possibly  gold 
at  a  commercial  centre  in  exchange  for  the  first.  Thus  re- 
demptions of  all  sorts  of  money  are  perpetual  and  unending ; 
or  at  least  they  are  indefinite  exchanges  of  money  for  money  ; 
of  money  in  one  place  for  money  in  another  place  by  the  in- 
struments named,  which  are  not  themselves  substitutes  for 
money  in  the  exchanges,  but  the  instruments  to  exchange 
money  at  one  place  for  money  at  another  place.  Personal 
credit  is  of  very  limited  power  in  buying  necessaries :  it  is 
sometimes  largely  resorted  to  to  help  dispose  of  overstock, 
and  it  is  a  potent  auxiliary  in  keeping  up  the  prices  of  some 
things  greatly  to  the  damage  of  the  holders  of  goods,  of 
which  there  is  an  overstock,  by  postponing  the  inevitable 
crisis ;  but  it  is  not  the  cause,  nor  is  it  a  part  of  the  original 
cause*  of  overstock.  Inasmuch  then  as  these  instruments, 
in  the  shape  of  bills,  checks,  etc.,  are  not  money,  and  differ 
from  bank-notes  and  credits  in  the  fact  that  bank-notes  and 
credits  are  redeemed  only  by  like  notes  and  credits,  that  is 
to  say  by  themselves  or  gold,  and  inasmuch  as  the  bank- 
notes, credits,  and  gold,  or  gold  and  silver,  are  mutually  con- 
vertible into  each  other,  it  is  clear  that  you,  Mr.  Banker,  and 
the  writers  you  refer  to,  that  is  to  say,  all  the  writers  there 
are,  are  entirely  mistaken  in  confounding  what  they  call 
bank  credit  with'  other  kinds  of  credit ;  and  that  personal 
credit  which  gives  rise  to  bills  of  exchange  and  promissory 
notes  is  something  very  different  in  its  results. 

The  question,  then,  is  reduced  to  this  form;  Is  money  a 
commodity  only,  like  other  commodities,  or  is  it  only  an 
ideal  unit  or  series  of  units  adopted  by  convention,  for  the 
purpose  of  effecting  the  exchanges  of  the  fruits  of  labor  and 
capital  principally,  and  capital  incidentally ;  value  as  a  com- 
modity in  the  material  of  money  being  serviceable,  and,  so 
far  as  experience  goes,  indispensable  to  maintain  the  number 
of  units  physically  represented  in  coin,  in  such  steady  pro- 
portion to  the  increase  of  consumption,  that  is  to  say  of 
commerce,  that  the  production  of  Relative  necessaries  shall 
keep  in  harmony  with  the  production  of  absolute  necessaries  ? 


REDEMPTION  OF  CURRENCY. 


225 


That  is  the  real  question.  Adam  Smith  is  the  only  writer  I 
know  of  who  has  referred  distinctly  to  the  question  of  rela- 
tive and  absolute  necessaries  upon  general  principles  inde- 
pendently of  money.  That  great  Scotchman  distinctly  refers 
to  it  on  page  130  of  the  "  Wealth  of  Nations,"  fourth  edition, 
London,  by  Alex.  Murray.  It  would  be  impossible  to  discuss 
further  the  question  whether  money  is  a  commodity  or  only 
an  ideal  unit,  without  inquiring  particularly  what  circulation 
is ;  and  that  is  a  subject  by  itself,  discussed  under  the  head 
of  circulation. 

Adam  Smith  showed  very  plainly  that  money  is  subor- 
dinate to  production,  and  that  wealth  comes  from  labor,  and 
he  ought  to  have  added,  as  M.  Say  does,  from  the  coopera- 
tion with  labor  of  the  productive  powers  of  nature  appro- 
priated through  land  ;  but  he  is  right  in  the  main,  and  is  sup- 
posed to  have  demonstrated  the  falsity  of  what  is  called  the 
mercantile  theory.  He  has  done  so  only  as  respects  freedom 
of  trade  and  the  necessity  of  giving  the  freest  circulation  to 
gold  from  one  part  of  the  commercial  world  to  the  other. 
But  he  never  succeeded  in  showing,  as  some  allege,  that  large 
imports  of  gold  do  not  show  a  healthy  state  of  commerce  for 
the  country  importing,  because  they  actually  show  the  con- 
trary. They  not  merely  show,  they  absolutely  demonstrate, 
that  the  importing  country  is  receiving  gold  because  it  is  sell- 
ing more  than  it  is  consuming ;  and  by  and  by,  when  it 
chooses,  can  call  upon  the  commercial  world  for  merchandise, 
the  equivalent  of  the  imported  gold,  because  it  has  refrained 
from  consuming  goods  to  that  amount  with  a  demonstrated 
right  to  do  it  at  a  future  time.  Precisely  so  is  it  with  a 
thrifty  and  economical  producer  who  has  gold  to  show  for  the 
proceeds  of  what  he  has  sold  and  not  consumed.  When  the 
mercantile  theory  taught  that  gold  and  silver  were  real 
wealth,  and  that  being  so  they  ought  to  be  kept  at  home  by 
the  most  stringent,  and  invited  from  abroad  by  the  most 
liberal,  provisions,  it  only  proved  the  falsity  of  your  doctrine 
of  intrinsic  value  by  a  reductio  ad  absurdum.  Undoubtedly 
the  stimulus  given  to  production  and  enterprise  by  the  dis- 
coveries of  gold  and  silver  and  working  of  mines,  after  the 

15 


226 


POLITICAL  ECONOMY. 


discovery  of  America,  had  a  powerful  influence  upon  the 
progress  of  mankind  ;  and  the  same  kind  of  stimulus  is  now 
afforded  through  money  put  in  circulation  by  bank  loans  up 
to  a  point  much  short  of  a  crisis.  The  mercantile  theory 
still  prevails  in  the  world  and  with  all  the  writers  upon 
money  and  exchange.  It  is  simply  the  theory  that  money 
is  a  commodity  and  possesses  intrinsic  value,  and  that  the 
object  of  convertibility  is  merely  the  metal  promised,  in 
spite  of  absolute  demonstration  to  the  contrary.  The  infer- 
ence from  this  theory  is,  that  gold  coin  being  an  object  to 
be  sought  for  itself,  it  must  necessarily  be  a  standard,  and 
being  a  standard,  so  long  as  bank-notes  or  credits  are  on  a 
par  with  gold  there  can  be  no  undue  expansion ;  that  under 
an  inconvertible  currency  the  premium  on  gold  marks  the 
deviation  of  the  paper  from  the  standard  and  the  loss  of 
purchasing  power  or  exchangeable  value  of  the  paper  ;  that 
under  a  convertible  currency  redemption  of  bank-notes  in 
coin,  although  seldom  taking  place,  and  "  clearing  "  at  com- 
mercial centres,  where  actual  payments  in  coin  are  rendered 
unnecessary  through  the  clearing  because  the  gold  would  be 
immediately  redeposited,  show  conclusively  that  the  currency 
is  at  par,  because  gold  coin  having  intrinsic  value  as  money 
is  a  commodity,  and  all  the  paper  and  credits  are  mere 
promises  to  pay  it.  They  ignore  or  rather  they  do  not  per- 
ceive the  fact  that  bank  credits  and  bank-notes  have  been  the 
principal  currency  of  the  United  States  for  generations,  — 
the  notes  and  credits  of  one  banker  succeeding  to  those  of 
another,  —  and  that  the  quantity  of  gold  in  circulation  in 
England  varies  precisely  as  the  volume  of  bank  credits  ;  that 
is  to  say,  that  it  varies  just  as  bankers  choose  to  make  it 
vary  by  the  quantities  they  cause  to  go  into  circulation  to 
pay  for  labor  and  advance  production  ahead  of  consump- 
tion. The  circulation  of  England  may  for  all  practical  pur- 
poses be  called  gold,  with  silver  enough  for  small  payments 
and  change  ;  but  instead  of  varying  as  gold  would  were  there 
no  banks  of  discount  and  deposit,  it  varies  with  the  discount 
market:  the  more  discounts  the  bank  ledgers  show,  the 
longer  and  larger  the  lists  of  securities  received  from  mer- 


EEDEMPTION  OF  CURRENCY. 


227 


chants  and  manufacturers  the  lower  becomes  the  gold  re- 
serve, and  the  lower  the  gold  reserve  the  larger  the  circula- 
tion of  gold. 

The  grand  advantage  of  a  metallic  circulation  without 
banks  of  discount  and  deposit,  and  which  makes  the  loss 
of  the  unequaled  benefits  and  conveniences  of  deposits  tol- 
erable, is  the  comparative  security  it  affords,  as  in  France, 
against  industrial  crises  arising  within  the  country.  And 
why  does  it  afford  that  security  ?  Simply  because  there  are 
no  banks  to  loan  from,  and  although  money  is  abundant, 
it  cannot  be  circulated  so  as  to  buy  raw  material  and  labor 
enough  to  make  an  overstock  sufficient  to  cause  an  indus- 
trial crisis,  and  there  being  no  banks,  there  can  be  no 
banking  crisis.  If  it  be  true  that  the  money  unit  is  not 
ideal,  and  merely  a  denominator  of  vakies  ;  if  it  be  true 
that  metallic  money  possessed  of  intrinsic  value  is  the  only 
real  money  in  the  commercial  world ;  that  bank-notes  and 
bank  credits  are  mere  credits,  and  not  powers  to  circulate 
money,  and  that  one  kind  of  credit  is  as  potent  to  raise  and 
sustain  general  prices  as  another,  —  why  have  we  never  seen 
industrial  crises  in  France,  as  we  have  seen  them  in  England 
and  the  United  States?  There  is  but  one  reason,  and  that 
is,  that  personal  credit  is  not  adequate  to  raise  general  prices, 
and  therefore  there  has  not  been  a  sufficient  amount  of  over- 
stock or  unproductive  investment  (whichever  we  choose  to 
call  it)  to  bring  on  an  industrial  crisis  in  the  English  and 
American  sense. 

Finally,  there  is  an  unfailing  test  of  money,  — that  is  to 
say,  of  what  constitutes  money.  That  test  is  not  the  fact 
that  the  thing  affirmed  to  be  money  cost  labor,  because  labor 
may  be  thrown  away  in  the  performance  of  an  entirely  un- 
profitable and  useless  act ;  but  it  is  the  fact  that  it  is  always 
redeemable  with  that  which  has  cost  actual  values,  or  will 
at  least  procure  them  when  desired.  Ordinary  and  final 
redemptions  take  place  in  something  which  has  cost  actual 
values  for  the  most  part,  excepting  always  a  final  redemp- 
tion of  a  metallic  currency  by  one  or  more  governments. 
Thus,  for  example,  when  a  bank  receives  on  deposit  bank- 


228 


POLITICAL  ECONOMY, 


notes  paid  by  a  consumer  to  a  retail  merchant,  who,  as  a  pro- 
ducer, deposits  them  in  a  bank,  and  shortly  obtains  from  the 
bank  a  check  or  draft  upon  a  bank  in  a  commercial  centre, 
and  remits  the  check  to  the  wholesale  dealer  in  payment  of 
his  purchases,  and  the  wholesale  dealer  obtains  a  transfer  of 
credit  to  himself  to  that  amount,  the  credit  so  transferred 
through  the  instrumentality  of  the  check  has  cost  the  cus- 
tomer who  transfers  it  value  to  that  amount,  and  this  transiv 
ferred  credit  is  afterwards  set  off  against  the  wholesale 
merchant's  debt  in  bank.  This  is  the  ordinary  form  of  re- 
deeming bank-notes,  first  and  last ;  and  when  a  bank  winds 
up  and  retires,  either  its  bank-notes  and  credits,  or  credits 
alone  if  it  has  issued  no  notes,  its  final  redemptions  or  can- 
celings  of  credit  are  performed  in  like  manner  to  a  large 
extent.  Bank-notes  are  redeemed,  then,  by  the  transfer  to 
the  holders  of  an  equal  amount  of  bank  credit,  chiefly  at  a 
commercial  centre  ;  and  the  holder  or  indorsee  then  con- 
summates the  redemption  by  authorizing,  through  his  own 
check,  the  canceling  of  that  bank  credit  by  setting  it  off 
against  his  bill  or  note  held  by  a  bank,  and  which  is  can- 
celed and  returned  to  him  in  pursuance  of  the  cancellation 
of  the  bank  credit  covered  by  his  check.  But  the  final  re- 
demption of  a  metallic  currency  takes  place  by  common  con- 
sent, through  the  agency  of  the  government  or  governments 
making  it ;  and  the  medium  in  which  the  redemption  is 
made  may  have  cost  something,  or  it  may  have  cost  com- 
paratively nothing.  If,  in  another  metal,  that  metal  may 
have  cost  only  a  fraction  of  what  the  demonetized  metal 
has  cost  the  holders.  Shortly  after  the  exchange  has  taken 
place,  however,  the  new  coin  will  represent  —  what  ?  Noth- 
ing but  itself,  certainly  ;  but  it  will  now  have  cost  the 'hold- 
ers goods  to  the  value  stamped  on  all  the  new  coin,  and  not 
the  amount  of  labor  which  the  metal  cost  before  monetiza- 
tion.  The  amount  of  labor  it  cost  has  nothing  to  do  with 
the  value  of  the  new  money ;  but  because  the  metal  has 
been  monetized,  it  will  be  mined  with  great  care  and  at 
greater  expense  in  the  future.  The  result  will  be,  that  the 
whole  value  of  the  metal  as  a  commodity  is  determined  by 


REDEMPTION  OF  CURRENCY. 


229 


its  money  value,  and  those  who  cannot  make  a  living  by- 
mining  for  the  metal  will  be  forced  by  necessity  to  abandon 
mining.  The  cost  of  the  metal  in  labor  has  nothing  to  do 
with  its  money  value  in  any  other  way  or  to  any  other  ex- 
tent. The  quantity  of  it  on  hand,  and  not  only  on  hand, 
but  used,  determines  its  exchangeable  value,  and  not  the 
quantity  on  hand  alone,  as  happens  with  all  other  commod- 
ities. 

That  the  cost  of  labor,  then,  determines  the  value  of  either 
money  or  anything  else  must  be  abandoned,  giving  way  to 
the  elements  of  utility,  necessity,  and  quantity.  Days'  or 
weeks'  work  do  not  furnish  a  measure  of  value  among  sav- 
ages ;  but  if  they  do,  quantities  have  taken,  through  the 
progress  of  civilization,  the  place  of  that  measure  in  the 
shape  of  units  of  money  and  units  of  weight  and  measure,  as 
artillery  and  small  arms  the  place  of  bows  and  arrows. 

The  only  positive  law  which  can  be  said  with  any  cer- 
tainty to  exist  in  relation  to  compensation  for  labor  is,  that 
unless  one  kind  of  labor  will  furnish  the  necessaries  of  life 
at  least,  the  laborer  will  be  compelled  to  abandon  it  to  un- 
dertake labor  that  will ;  and  we  may  add  also,  that  in  the 
end  the  laborer  will  only  labor  at  that  work  which  will  fur- 
nish the  ordinary  comforts  of  life,  if  they  are  to  be  had. 
The  motives  which  control  human  action  in  reference  to 
labor  can  be  laid  down  no  further  with  any  pretense  of  cer- 
tainty. The  labor,  however,  which  is  applied  towards  the 
production  of  gold  and  silver  must  be  thrown  out  of  consid- 
eration entirely,  as  a  rule  or  guide  in  ascertaining  the  value 
of  metallic  money.  Its  value  is  extrinsic  and  conventional, 
like  that  of  bank-notes  and  bank  credits  immediately  con- 
vertible into  bank-notes  or  gold.  In  point  of  true  monetary 
science  it  does  not  differ  from  them  essentially,  except  that 
the  units  tangible  in  gold  cannot  be  increased  at  pleasure, 
and  therefore  furnish  better  means  towards  the  end  of  all 
money.  Hence  there  is  no  gold  standard.  The  money  unit 
is  the  ideal  and  only  standard.  Gold,  subject  to  the  fate  of 
indirect  demonetization  of  one  of  the  metals,  may  be  fixed 
in  the  ratio  of  12  or  16  or  20  to  silver ;  or  silver,  or  even 


230 


POLITICAL  ECONOMY. 


tin,  conversely  in  the  ratio  of  iV?  k  gold.  It  is  a 
matter  of  convention,  subject  to  only  two  conditions;  1st, 
the  convention  must  be  universal;  2d,  it  must  fix  the  barter 
rates  between  the  metals  at  the  natural  average  as  shown  by 
experience,  as  nearly  as  possible. 

If  either  of  the  metals  be  overvalued  according  to  the  ex- 
isting ratios  of  value,  it  will  circulate  in  the  market  of  over- 
valuation to  the  exclusion  of  the  other,  if  coinage  is  free  to 
all ;  if  undervalued,  it  will  depart.  The  whole  question  is 
one  of  barter  relation  between  the  two  metals,  and  there 
must  be  two  metals,  therefore,  in  order  to  have  undervalua- 
tion or  overvaluation.  Were  silver  and  gold  universally 
monetized,  it  is  an  open  question  how  far  either  could  be 
universally  undervalued  or  universally  overvalued.  This 
would  depend  upon  the  value  to  which  it  would  sink,  if  de- 
monetized. If  both  could  be  universally  monetized  at  such 
a  reduced  barter  rate  for  silver  as  would  gradually  appreciate 
gold  and  reduce  the  total  metallic  mass  of  coin  by  carrying 
more  of  it  into  manufacture  without  at  the  same  time  ma- 
terially discouraging  and  therefore  diminishing  the  annual 
product,  it  would  be  well.  Meantime  gold  will  suffice  for  all 
the  purposes  of  circulation  in  Europe  and  the  United  States, 
unless  and  until  the  Eastern  nations  abandon  silver. 

EEDEMPTION  OF  BANK-NOTES,  AND  THE  FALLACIES  CON- 
NECTED THEREWITH. 

It  has  been  shown  that  currencies  of  all  kinds  are  re- 
deemed from  time  to  time  with  other  currency,  and  bank- 
notes constitute  no  exception.  On  the  contrary,  however, 
the  popular  idea  is,  that  there  is  no  other  kind  of  redemp- 
tion but  that  of  bank-notes.  One  object,  and  the  chief  object, 
in  redeeming  bank-notes  promptly  in  coin  is  to  keep  the  vol- 
ume of  the  notes  in  even  proportion  to  consumption  of  com- 
modities, and  for  that  purpose  not  to  allow  it  to  increase 
any  faster  than  the  annual  production  of  metal  whose  place 
it  takes.  It  will  then  increase  only  with  the  consumption, 
and  not  the  production,  of  commodities.  This  redemption 
of  bank-notes  applies  only  in  the  case  of  banks  of  issue  with- 


REDEMPTION  OF  CURRENCY. 


231 


out  the  functions  of  deposit  and  discount.  In  that  case  the 
redemption  fund  comes  from  the  commercial  world's  stock  of 
metal  at  large,  and  therefore  only  from  metal  obtained  by- 
producers  who  have  sold  stock  or  products  to  consumers  who 
sold  products  of  their  own,  and  not  consumers  who  have  sold 
only  labor  without  any  sale  of  its  product  following.  There 
are,  then,  two  great  objects  to  be  gained  by  redemptions : 
to  keep  an  even  volume  of  circulation,  as  in  the  case  of  banks 
of  issue,  and  to  prevent  the  excessive  consumption  of  com- 
modities by  laborers,  and  producers  who  have  obtained  them 
in  exchange  for  labor  only,  and  not  for  other  commodities. 
It  is  impossible  to  explain  the  process  of  redemptions  with- 
out tearing  away  the  veil  or  mask  thrown  over  it  by  money. 
That  done,  the  real  object  of  redemptions  becomes  compara- 
tively plain.  That  object,  in  general  terms,  is  to  maintain 
harmony  of  production.  That  harmony  cannot  be  main- 
tained even  by  redemptions  in  gold,  if  made  out  of  a  fluc- 
tuating reserve  not  regulated  with  a  view  to  the  results  before 
mentioned.  It  is  said  by  most  writers,  and  in  very  plain 
and  clear  terms  by  Professor  Perry  of  Amherst  College,  in 
his  work  on  Political  Economy,  that  a  redemption  in  metal 
is  an  end  in  itself,  because  the  metal  is  something  substan- 
tial and  a  commodity,  like  wheat,  for  instance.  This  is  a 
great  fallacy,  as  already  in  many  ways  shown.  Metal  is  not 
an  end  in  itself,  but  means  to  an  end.  This  end  has  been 
fully  explained  ;  and  to  meet  this  end  redemptions  are  essen- 
tial, in  addition  to  the  fact  that  in  the  payment  of  interna- 
tional balances  metal  is  indispensable,  because  the  field  of 
convention  for  paper  does  not  extend  beyond  the  country 
issuing  it.  The  sum  of  all  that  can  be  said  upon  the  subject 
of  redemption  is  that  the  true  objective  point  in  the  redemp- 
tion of  all  currencies,  whether  metallic  or  paper,  is  to  main- 
tain the  purchasing  power  of  the  money  at  as  steady  a  ratio 
as  possible.  Paper  money  not  convertible,  issued  by  gov- 
ernments, has  a  purchasing  power  guarantied  by  them.  If 
they  issue  too  much  the  guaranty  is  broken,  as  in  the  case 
of  the  French  assignats  and  the  old  Continental  currency  of 
the  United  States.    Overissues  by  banks  sometimes  end  in 


232 


POLITICAL  ECONOMY. 


the  same  way,  and  for  the  same  reason.  Silver  was  guar- 
antied by  the  greater  part  of  the  commercial  world,  and  the 
guaranty  is  broken  by  demonetizations  where  loss  comes  to 
any  holder  or  creditor  thereby  ;  but  inconvenience  only,  and 
not  loss  to  any  great  extent,  has  been  the  result  so  far. 

Gradual  gain  of  gold  in  purchasing  power  ought  to  be 
avoided  as  well  as  loss.  If  the  nations  which  have  demone- 
tized silver  have  by  so  doing  laid  a  foundation  for  such  a 
gain  either  in  gold  or  bank-notes,  they  have  committed  an 
error.  If  there  were  only  twenty-five  hundred  millions  of 
dollars  in  gold  and  silver  coin  in  the  world,  a  production  of 
one  hundred  millions  in  one  year  would  carry  say  thirty- 
three  and  one  third  millions  into  manufacture,  and  sixty-six 
and  two  thirds  millions  into  coin.  This  would  increase  the 
mass  of  coin  by  about  two  and  three  fourths  per  cent.  Double 
the  mass  of  coin,  and  the  ratio  of  increase  would  be  only 
one  and  three  eighths  per  cent.  The  rapid  increase  of  gold 
after  1850  for  a  time  was  probably  in  advance  of  the  increase 
of  commerce ;  but,  on  the  whole,  for  the  last  twenty-seven 
years  the  increase  has  not  been  in  advance  of  commerce. 
The  product  of  silver  has  been  less  than  that  of  gold.  It 
would  seem,  therefore,  to  be  worthy  of  consideration  whether 
it  would  not  be  wise  to  bring  about  a  universal  and  equal 
monetization  of  both  metals  everywhere  throughout  the  com- 
mercial world,  and  the  right  of  depositing  bullion  or  coin 
in  the  treasuries  of  governments  on  the  part  of  individuals, 
they  receiving  certificates  therefor. 


CHAPTER  VIII. 


PRODUCTION,  OVERPEODUCTION,  ILL-DIRECTED  PRODUCTION, 
PRODUCTION  ON  CREDIT  AND  SPECULATION. 

Production  is  the  foundation  of  commerce.  In  the  most 
abstract  or  general  sense  it  is  the  performance  of  some  act 
or  service  or  the  making  of  something  beneficial,  or  sup- 
posed to  be  beneficial,  to  the  producer,  first  for  his  own  use 
directly,  and,  secondly,  for  his  own  use  indirectly,  by  way 
of  exchanging  the  surplus  for  other  acts,  services,  or  things 
done  or  made  by  others.  Labor  is  the  human  act,  and  cap- 
ital the  thing  upon  which  and  by  aid  of  which  the  act  is 
brought  to  bear  in  causing  the  product,  whatever  that  prod- 
uct may  be.  Capital  itself  is  the  accumulated  result  of  labor, 
whatever  form  it  assumes,  and  of  natural  forces  and  natural 
material  upon  which  the  labor  and  force  are  exerted.  Defi- 
nitions are  important  only  when  popular  language  is  founded 
more  or  less  on  errors  and  fallacies  and  so  comes  short  of  suf- 
ficient precision.  In  a  general  sense,  commerce  is  a  branch 
of  production.  It  distributes  what  has  been  produced,  and 
thereby  gives  it  additional  value,  as  labor  gives  new  value  to 
material  which  is  already  a  product  of  labor  by  making  it 
into  a  new  product.  To  distribute  cotton  cloth  gives  it  a 
new  value,  as  spinning  and  weaving  give  new  value  to  cot- 
ton wool.  It  is  all  means  to  an  end,  and  that  end,  after  the 
producer's  consumption,  to  satisfy  his  own  wants,  is  exchange. 
Production,  therefore,  is  at  work  all  the  time,  from  the  very 
first  application  of  labor  which  originates  the  product,  to  the 
last,  which  through  the  medium  of  exchange  distributes  it 
to  the  consumers  by  means  of  local  or  neighborhood,  national 
or  international  commerce.  Money,  as  before  shown,  is  the 
conventional  commodity  by  means  of  which  the  exchange 


234 


POLITICAL  ECONOMY. 


is  effected.  Without  money  one  commodity  would  be  ex- 
changed directly  for  another  commodity  or  service,  and  one 
service  for  another  service  or  for  a  commodity.  All  nations 
which  have  emerged  from  barbarism,  and  many  nations  and 
tribes  in  a  state  of  barbarism,  have  invented  and  used  money 
of  some  sort,  and  hence  it  may  be  said  that  there  is  a  natu- 
ral tendency  to  adopt  and  use  it,  as  there  is  a  natural  ten- 
denc}^  to  the  use  of  language.  When  a  commodity  of  any 
kind  is  thus  used  as  money,  it  ceases  to  be  a  commodity  sub- 
ject to  the  common  law  of  supply  and  demand,  so  far  as  it 
is  used  as  money.  Its  exchangeable  value  in  the  shape  of 
bullion  or  other  raw  material  can  never  exceed  its  value  as 
money,  weight  for  weight,  although  it  may  be  less.  Its 
demonetization  in  one  country,  therefore,  and  consequent  re- 
striction of  its  use  there,  so  far,  to  that  of  an  ordinary  com- 
modity, may  to  a  very  considerable  extent  depreciate  it  when 
valued  in  the  new  money  which  takes  its  place,  without  im- 
mediately changing  or  reducing  its  exchangeable  value  in 
another  country  which  still  retains  it  as  money  ;  because  as 
money  it  is  only  a  unit  of  valuation,  purchase,  and  payment, 
and  prices  can  fall  only  so  far  as  additional  units  coined  out 
of  the  material  so  demonetized  are  put  in  circulation  in  the 
countries  still  using  the  material  as  money,  in  consequence 
of  the  demonetization  which  has  taken  place  elsewhere.  This 
process  is  now  going  on  slowly,  in  consequence  of  the  late 
demonetizations  of  silver.  Because  all  money  is  but  a  series 
of  such  units,  and  all  valuations  of  commodities  by  each  other, 
and  still  more  by  a  general  substitute  for  one  commodity, 
which  substitute  we  call  money,  are  made  by  units,  therefore 
inconvertible  government  and  bank  notes  are  largely  used 
as  money,  and  mere  credit  rights  entered  in  units,  and  duly 
and  regularly  redeemed  by  set-off,  or  units  transferred  by 
book  account,  provided  they  pass  in  absolute  payment  with- 
out recourse,  are  units  of  money,  and  stand  as  substitutes 
for  a  commodity,  as  do  gold  and  silver  coin  —  e.  g.  units  of 
bank  debt,  with  only  inconvertible  paper  in  the  reserve. 
The  end  of  production,  then,  so  far  as  it  is  enlarged  by  com- 
merce, being  exchange,  and  exchange  being  brought  about 


PRODUCTION,  OVERPRODUCTION,  ETC. 


235 


always  by  giving  one  commodity,  wanted  for  consumption, 
in  return  for  the  substitute  called  money,  which  completes 
the  exchange,  without  right  of  recourse  or  reclamation  of 
any  kind,  it  necessarily  follows  that  he  who  gives  a  real 
commodity  for  the  substitute  has  the  right  to  exchange  the 
substitute  for  any  real  commodity  he  may  want.  So  long 
as  he  does  only  this,  it  is  certain  that  the  substitute  can 
never  be  in  excess  of  the  real  commodity ;  its  exchange- 
able value  will  be  uniform,  which  means,  in  the  language  of 
money,  that  prices  will  always  be  steady. 

But  because  the  substitute  can  never  be  consumed  itself, 
while  it  always  maintains  its  universal  exchangeable  value, 
it  follows  that  if  by  means  of  loans  it  can  be  paid  out  for 
labor  faster  tlian  the  product  of  the  labor  can  be  exchanged 
for  the  purposes  of  actual  consumption,  this  excess  will 
necessarily  depreciate  it  as  valued  in  the  real  commodities 
actually  exchanged  against  it  for  the  purpose  of  consump- 
tion. This  will  necessarily  raise  the  price  of  the  goods  in 
stock  not  sold  by  raising  the  price  of  those  which  are  act- 
ually sold. 

Production,  then,  being  in  the  most  general  sense  in  which 
the  word  can  be  used  the  chief  employment  of  civilized  men, 
each  must  produce  with  some  degree  of  harmony  ;  and  if  one 
produces  largely  in  excess  of  another's  ability,  precisely  so 
far  the  latter  is  incapable  of  exchanging  with  him  ;  and  if 
the  former  has  produced  on  credit,  sooner  or  later  a  crisis 
must  take  place  in  his  production,  and  he  will  be  forced  to 
sell  his  surplus  for  what  he  can  get.  Upon  the  most  ab- 
stract or  general  reasoning  possible,  therefore,  there  cannot 
under  any  circumstances  be  a  general  overproduction,  because 
production  must  necessarily  proceed  in  harmony  upon  the 
average.  But  there  is  another  and  special  reason  why  gen- 
eral overproduction  is  impossible.  It  is  now  an  admitted 
and  established  fact  that  population  and  the  absolute  neces- 
saries of  life  always  keep  even  pace.  Therefore  we  may  call 
this  line  what  I  have  called  it  in  another  chapter,  the  base 
line  of  production,  beyond  which  all  other  production  cannot 
proceed  indefinitely,  either  in  time  or  quantity ;  but  will; 


236 


POLITICAL  ECONOMY. 


like  a  military  commander  who  abandons  military  law  by 
departing  too  long  and  too  far  from  his  base  of  supplies,  be 
suddenly  forced  back  by  reverses  to  the  base  line.  This  is 
production  and  these  are  the  general  laws  which  govern  it. 
The  cost  of  production  does  not  determine  prices,  but  prices 
up  to  the  time  of  a  crisis  determine  whether  production 
shall  go  on  and  at  what  pace  on  the  average,  or  whether  it 
shall  stop  altogether.  Average  price  results  on  the  whole 
from  average  production,  while  excessive  production  during 
the  time  it  is  going  on  carries  up  prices ;  and  defective  pro- 
duction which  succeeds  carries  down  prices.  The  whole 
system  of  exchange  is  necessarily  a  system  of  mutual  action 
and  reaction,  human  wants  being  the  source  of  action.  There 
is  a  limitation  to  the  production  of  absolute,  and  by  reason  of 
that  limitation  a  limit  to  the  production  of  relative  necessaries. 
The  limit  to  the  productive  powers  of  land  has  not  yet  been 
found,  and  it  is  only  a  speculative  question  what  lands  are 
first  cultivated.  It  is  not  always  the  best ;  it  is  not  always 
the  poorest;  the  one  or  the  other  is  taken  first,  as  circum- 
stances may  determine.  Large  bodies  of  the  best  land  are 
unimproved  in  the  United  States  at  this  time  because  the 
improvement  would  really  or  presumptively  cost  too  much  for 
profit,  while  large  bodies  of  the  best  land  have  been  improved 
because  ready  for  improvement.  The  capacity  of  the  United 
States  to  produce  the  necessaries  of  life  has  been  scarcely 
broached,  while  its  power  to  produce  other  necessaries  is  ad- 
vancing with  giant  strides. 

OVERPRODUCTION  AND  ILL-DIRECTED  PRODUCTION. 

All  overproduction  is  necessarily  ill-directed  production. 
The  first  term  is  the  most  expressive,  for  all  production 
whose  products  cannot  be  sold  for  a  long  time,  and  when 
sold  can  be  sold  only  at  a  great  loss,  and  perhaps  sometimes 
not  at  all,  is  necessarily  overproduction.  But  because  general 
overproduction  is  impossible,  some  deny  that  there  can  be 
any  overproduction.  It  is  only  a  fallacy  of  words.  There 
surely  can  be  overproduction,  if  there  can  be  ill-directed 
production.    This  overproduction,  as  already  shown,  is  in 


PRODUCTION,  OVERPRODUCTION,  ETC.  237 


relative  necessaries  only.  The  average  expenses  of  living 
and  maintenance  of  capital  absorb  all  but  a  small  percentage 
of  what  is  anually  produced,  and  therefore  while  the  over- 
stock is  being  produced  the  cost  of  it  is  largely  consumed  in 
the  expenses  of  living  on  the  part  of  the  producers  and  labor- 
ers. Hence  the  danger  of  absolute  bankruptcy,  if  the  over- 
stock be  very  large,  unless  the  capital  is  large  in  proportion, 
and  under  all  circumstances  the  certainty  of  loss,  and  dis- 
charge of  laborers.  There  may  be  ill-directed  production 
which  results  in  almost  or  quite  total  loss.  This  occurs  where 
it  is  uncertain  in  the  beginning,  or  becomes  such  in  the  prog- 
ress of  the  work,  whether  the  result  will  pay.  If  a  man 
were  to  undertake  to  build  a  pyramid,  it  would  be  reason- 
ably certain  in  the  start  not  to  pay ;  when  merchants  and 
speculators  in  England  undertook  to  raise  cotton  in  India, 
and  invest  in  railroads  and  other  undertakings  in  foreign 
countries,  there  was  a  prospect  of  success  in  the  beginning, 
but  the  investments  in  cotton  culture  were  ill-directed,  be- 
cause if  ever  destined  to  be  a  success  long  time  was  required 
to  bring  it  about.  After  all,  therefore,  the  investment  in 
cotton  culture  as  well  as  in  railroads  and  other  undertakings 
was  one  of  excess.  Too  much  money  was  invested  ;  the  error 
was  not  in  making  any  investments  at  all,  but  in  investing 
too  much.  To  affirm  as  most  writers  do  that  a  banking, 
commercial,  and  industrial  crisis  arises  from  unproductive 
investment  altogether,  from  the  consumption  of  food,  clothes, 
etc.,  by  the  laborers,  for  which  nothing  valuable  can  be  shown 
in  return,  is  to  affirm  that  men  borrow  money  and  expend  it  in 
something  beside  production ;  it  is  to  put  one  of  the  effects 
in  the  place  of  the  cause.  The  crisis  of  1866  in  England  pre- 
sented its  banking  in  a  marked  degree  over  its  industrial 
phase,  because  the  labor  was  largely  invested  abroad.  There 
was  at  home  an  industrial  crisis,  but  that  crisis  had  begun 
long  before  from  the  scarcity  and  high  price  of  cotton,  and 
other  causes.  The  crisis  of  1866  resulted  partly  from  the  fact 
that  cotton  could  not  be  obtained  from  India  so  as  to  com- 
pete successfully  with  American  after  the  close  of  the  Amer- 
ican civil  war  in  1865.    The  crisis  of  1873  in  the  United 


238 


POLITICAL  ECONOMY. 


States  was  not  the  result  of  the  unproductive  investments 
made.  The  crisis  and  the  unproductive  investments,  on  the 
contrary,  were  both  results  in  an  inverse  order  of  another 
cause,  and  that  cause  was  overproduction,  which,  because  in 
excess  and  so  far  as  it  was  in  excess,  was  undoubtedly  ill- 
directed.  Its  excess  had  two  elements,  which  it  is  important 
to  distinguish.  The  first  in  order  was  excess  of  production 
or  production  of  relative  necessaries  in  advance  of  popula- 
tion and  the  absolute  necessaries  of  life.  Such  excess  has 
become  much  more  liable  to  occur  by  improvements  in 
machinery  and  processes,  and  the  economy  of  labor  which 
follows.  It  results  from  this  that  the  world  is  or  would  be 
benefited  greatly,  if  the  labor  thus  saved  could  be  redis- 
tributed. But  if  redistributed,  where  should  it  be  placed? 
At  or  near  the  base  line  of  production  undoubtedly ;  and 
then  we  should  have  a  country  equal  to,  and  rather  in  ad- 
vance of,  city  and  town  growth.  Native  population  in  our 
manufacturing  districts  does  not  show  a  healthy  increase : 
we  must  expect  strikes,  violence,  and  crime  on  an  enlarged 
scale  if  the  process  of  turning  away  thousands  of  men  who 
are  engaged  in  manufacturing,  and  converting  many  of  them 
into  vagrants,  is  to  be  repeated.  There  has  been  undoubt- 
edly an  excess  of  cloth,  of  iron,  of  lumber,  and  materials. 
That  excess  is  now  being  compensated  by  diminished  and 
cheapened  production  and  average  will  be  the  result.  If 
the  average  could  have  been  maintained  all  the  time  hereto- 
fore as  the  practical  result  of  the  forces  at  work,  according 
to  M.  Say's  demonstration,  it  would  be  maintained  now  and 
hereafter,  instead  of  excess  and  defect.  There  would  have 
been  all  the  time  rather  more  laborers  at  the  plow,  wages 
would  have  been  steady,  iron  and  cloth  would  have  com- 
manded and  would  now  command  prices  to  be  found  by  add- 
ing the  highest  to  the  lowest  prices  and  dividing  by  two. 
But  it  is  said  by  the  writers  referred  to  that  a  crisis  comes  in 
so  far  as  the  work  accomplished  results  in  an  almost  or  quite 
total  loss  ;  that  the  results  in  the  shape  of  railroads  and  roll- 
ing stock,  mills,  etc.,  do  not  pay,  and  hence  the  crisis  because 
the  producers  lose  the  amount  invested.    This  is  a  monstrous 


PRODUCTION,  OVERPRODUCTION,  ETC.  239 


fallacy.  Doubtless  in  most  cases  there  is  either  bankruptcy 
or  great  loss  to  the  producers  and  investers,  but  the  railroads, 
if  they  have  bankrupted  any  of  these,  have  caused  a  gain  to 
the  landed  interest  of  the  neighborhood  equal  to  the  loss. 
These  producers  and  investers  have  merely  undertaken  to 
bring  to  market  extensive  regions  which  otherwise  would 
have  remained  without,  and  if  the  debentures  were  scaled 
down  to  correspond  with  present  cost  of  materials  for  roads 
in  good  credit,  many  of  them  would  pay  now  and  all  would 
pay  soon.  In  like  manner,  if  the  overproduced  cloth,  lum- 
ber, etc.,  goes  into  second  hands  at  present  prices,  it  can  still 
be  sold  at  a  profit,  but  time  is  required  for  consumers  to 
catch  up  with  producers.  The  idea  that  the  producers  of 
the  relative  necessaries  adapted  to  the  present  state  of  civ- 
ilization have  been  for  years  not  only  throwing  away  their 
time,  but  producing  things  utterly  worthless,  is  entirely  at 
variance  with  the  truth  of  the  case.  It  is,  in  point  of  fact, 
simply  a  question  of  greater  or  less  excess  for  the  most  part, 
although  some  cases,  like  that  of  raising  cotton  in  India,  or 
building  a  railroad  where  population  never  can  overtake  it, 
may  constitute  exceptions.  It  is  relative  excess,  then,  and 
still  more  enormous  cost,  which  always  accompanies  excess, 
that  in  the  United  States  especially  have  brought  on  com- 
mercial and  industrial  crises.  It  further  appears  that  if  prices 
had  remained  steady  the  results  would,  at  those  prices,  pay. 
But  I  have  demonstrated  in  other  chapters  that  steady  prices 
with  a  rising  scale  of  production  are  impossible.  If  real  com- 
modities could  be  exchanged  for  each  other  as  readily  with- 
out as  with  the  aid  of  money,  and  if  money  were  therefore 
entirely  dispensed  with,  I  have  demonstrated  clearly  that 
overproduction  to  any  great  extent  would  be  impossible, 
because  the  prices  of  the  overproduced  articles  would  neces- 
sarily fall :  the  greater  the  overproduction  the  greater  the 
fall.  On  the  other  hand,  the  absolute  necessaries  of  life 
which  the  producers  would  have  to  borrow  for  themselves 
and  workmen,  while  the  overproduction  was  going  on,  would 
thus  be  relatively  underproduced,  and  would  rise  as  much  as 
the  others  fell.    But  with  the  use  of  a  substitute  commodity, 


240 


POLITICAL  ECONOMY. 


money,  prices  are  all  reckoned  in  money:  the  greater  the 
overproduction  in  any  quarter  the  greater  the  amount  of  the 
substitute  put  in  circulation  by  being  paid  to  the  workmen  ; 
as  in  the  other  case  in  the  absence  of  money,  the  greater  the 
overproduction  the  larger  the  amount  of  the  necessaries  of 
life  the  producers  would  borrow  for  their  workmen,  as  well 
as  for  themselves  and  the  sellers  of  raw  material. 

But  as  the  producers,  in  the  absence  of  money,  would  be 
compelled  to  borrow  the  necessaries  of  life,  borrrowing  the 
more  the  more  they  overproduced,  if  it  were  possible  and 
apparently  profitable  to  do  so,  they  would  thus  cause  an  ex- 
pansion of  production  in  their  quarter  in  excess  of  its  expan- 
sion in  other  quarters.  This  would  be  an  expansion  of 
production  upon  credit  by  loans  analogous  to  the  expansion 
which  actually  takes  place  by  means  of  money  loans ;  and  it 
is  well  known  that  continual  expansion,  for  a  time,  followed 
by  continual  contraction,  for  a  time,  of  loans,  takes  place  by 
means  of  banks,  as  I  have  shown  elsewhere. 

In  all  the  cases  referred  to,  this  expansion  of  production 
is  in  advance  of  the  market  of  consumers.  For  this  reason, 
as  well  as  the  fact  that  it  is  accomplished  by  loans,  it  may 
well  be  called  Production  upon  Credit. 

PRODUCTION  ON  CREDIT  AND  SPECULATION. 

Production  on  credit  I  have  so  called  because  it  is  effected 
by  means  of  loans  upon  the  credit  of  producers,  and  because 
being  in  advance  of  the  market  of  consumers,  this  branch  of 
production,  which  is  in  excess,  has  borrowed  a  corresponding 
amount  from  that  which  is  not  in  excess.  The  former  thus 
becomes  debtor  to  the  latter  and  the  latter  creditor  to  the 
former  in  the  grand  system  of  exchanges.  The  debt  is  paid 
by  the  sacrifice  of  the  overstock  below  cost,  and  falling  off 
in  product  afterward,  as  happens  in  all  commercial  and  in- 
dustrial crises.  If  the  foregoing  analysis  is  sound,  what  is 
called  speculation  is  not  the  cause  but  the  result  of  the  causes 
already  referred  to. 

Overproduction  expands  prices  and,  for  a  time,  expands 
commerce.    The  extension  of  railroads,  the  growth  of  towns 


PRODUCTION,  OVERPRODUCTION,  ETC. 


241 


and  cities,  and  a  general  advance  in  real  estate,  are  some  of 
the  results.  It  is  not  the  expansion  of  speculative  value  in 
such  property  which  causes  expansion  of  production  and  ex- 
pansion of  loans  to  take  place,  but  the  expansion  of  the  two 
latter  which  causes  the  expansion  of  the  former.  Production 
is  the  great  business  of  the  world  ;  speculation  the  occasional 
business  of  a  small  part  of  it.  It  is  not  possible  that  the  chief 
business  of  the  world  or  of  a  great  country  can  be  controlled 
by  the  business  of  a  small  part  of  it ;  the  greater  force  un- 
doubtedly controls  the  less.  By  keeping  production  in  har- 
mony, therefore,  all  other  things  will  be  kept  in  harmony. 
But  to  keep  production  in  harmony  prices  must  be  kept 
steady ;  there  must  rather  be  such  a  currency  in  use  that 
loans  cannot  be  made  to  such  an  extent  as  to  enable  pro- 
ducers to  expand  the  production  of  the  relative  so  far  in  ex- 
cess of  absolute  necessaries  as  to  bring  on  a  banking,  com- 
mercial, and  industrial  crisis.  To  effect  this  there  must  be 
some  fixed  point  beyond  which  loans  cannot  be  made.  It  is 
excessive  production  on  credit,  leading  to  excessive  specula- 
tion which,  more  than  anything  else,  causes  such  an  uneven 
distribution  of  wealth  in  England  and  the  United  States. 
With  steady  prices  there  would  be  fewer  failures  and  vastly 
less  speculation.  The  most  available  plan  of  making  prices 
steady  I  have  shown  elsewhere. 

When  a  large  proportion  of  business  men  fail  in  every  few 
years,  it  is  impossible  that  a  fair  distribution  of  wealth  and 
capital  can  be  going  on.  If  the  larger  part  become  bankrupt, 
or  very  nearly  so,  the  actual  gains  made  are  confined  to  a 
few  :  railroads  and  lines  of  business  fall  into  a  few  hands, 
and,  although  one  man's  gain  is  not  entirely  another's  loss, 
this  condition  of  things  naturally  tends  to  throw  business 
and  capital  into  a  few  hands.  The  workmen  who  are  turned 
out  of  employment,  entirely  without  any  conception  of  the 
source  of  the  blow  that  has  struck  them,  naturally  attribute 
it  to  the  owners  of  capital,  many  of  whom,  through  bank- 
ruptcy—  and,  in  fact,  as  I  have  just  stated,  the  most  of  whom 
—  have  suffered  in  company  with  themselves.  Thus  their 
minds  are  prepared  for  the  introduction  of  the  most  absurd 

16 


242 


POLITICAL  ECONOMY. 


and  impracticable  ideas  which,  so  far  as  they  can  have  any 
effect,  defeat  their  own  object  and  overwhelm  the  workmen 
and  the  producer  in  one  common  ruin.  All  of  them  are 
entirely  ignorant  of  the  true  cause  of  their  grievances. 

If  prices  could  be  kept  as  steady  as  they  are  in  France, 
wages  would  be  steady.  No  more  workmen  would  be  found 
at  any  employment  than  ought  to  be  there,  and  no  more 
than  could  always  stay  there.  There  can  be  no  perma- 
nent overproduction  in  any  quarter,  because  excessive  is  fol- 
lowed by  defective  production.  The  result  of  steady  prices, 
therefore,  would  not  be  to  produce  less  than  now,  but  to  pro- 
duce as  much,  and  even  more,  upon  the  average,  because  con- 
sumers would  be  able  to  take  more  upon  the  average.  To 
produce  in  excess  is  to  produce  not  only  upon  credit,  but  un- 
duly expanded  credit.  The  use  of  money  itself  is  the  use  of 
a  kind  of  credit.  Whoever  has  paid  commodities  for  money 
stands  credited  with  commodities  while  he  holds  the  money. 
If  he  produces  a  new  commodity  by  the  expenditure  of  the 
money  for  labor  and  material,  either  in  his  own  proper 
person  or  representatively  through  another  by  loaning  the 
money,  he  has  parted  with  that  credit  to  another,  who,  in- 
stead of  using  it  in  exchange  for  a  commodity  already  exist- 
ing, has  exchanged  it  for  a  new  one,  in  expectation  of  a  con- 
sumer. If  the  latter  credit  is  soon  canceled  by  a  consumer 
there  is  no  undue  expansion  of  production,  and  no  undue 
expansion  of  producing  credit.  If  the  stock  of  unsold  prod- 
ucts, instead  of  being  sold  to  consumers,  in  due  time,  how- 
ever, continues  to  expand  and  accumulate,  the  credit  referred 
to  is  unduly  expanded ;  and  this  kind  of  expansion  I  have 
elsewhere  called,  from  a  money  point  of  view,  an  undue  ex- 
pansion of  circulation,  —  undue,  because  it  continues  to  ex- 
pand day  by  day  until  a  crisis,  and  then  it  begins  and  con- 
tinues to  contract  day  by  day.  When  it  begins  to  contract, 
no  enterprise  on  the  part  of  producers,  and  no  effort  on  the 
part  of  lenders,  can  change  the  force  of  the  contraction  and 
convert  it  into  one  of  expansion. 

The  contraction  of  circulation  is  the  subjective  result  of  a 
power  greater  than  itself.    The  power  at  work  is  the  con- 


PEODTJCTION,  OVERPRODUCTION,  ETC.  243 


traction  of  production.  This  power  is  now  at  work  (1877) 
in  the  United  States.  It  is  the  opinion  of  some  writers  upon 
money  and  exchange,  that  a  free  issue  of  inconvertible  gov- 
ernment paper  would  have  the  effect  of  stimulating  produc- 
tion. Such  an  issue  at  this  time  would  have  precisely  this 
effect :  it  would  depreciate  the  value  of  all  the  bank  and 
government  paper  now  outstanding,  and  bring  itself  and 
these  to  one  common  level.  It  would  nominally  raise  the 
value  of  merchandise,  and  enable  the  holders  to  sell  at  a 
profit,  so  far  as  it  enabled  them  to  pay  the  debt  they  owe  for 
that  merchandise  in  a  depreciated  currency.  But  it  could 
never  accomplish  what  the  theorists  who  support  it  claim 
for  it,  —  it  could  never  stimulate  production  to  any  impor- 
tant extent,  and  probably  not  in  the  slightest  degree,  for  the 
unanswerable  reason  that  it  would  depreciate  so  fast  that 
the  cost  of  production  would  immediately  catch  up  with  the 
prices  of  the  merchandise  already  on  hand.  To  successfully 
stimulate  production  in  such  a  way  as  to  call  back  a  single 
workman  to  the  forge  or  mill  would  be  as  impossible  as  to 
stop  the  contraction  of  a  mass  of  molten  metal,  which  is  out 
of  the  furnace,  without  putting  it  back  into  the  furnace. 
The  forces  at  work  are  entirely  uncontrollable  by  any  such 
contrivance. 

There  never  was  any  lack  of  money  yet  when  the  forces 
of  production  were  ready  to  expand,  and  no  money  is  of  any 
avail  when  they  have  unduly  expanded,  and  have  begun  or 
are  about  to  contract. 

Steady  prices  are  not  a  cause,  but  an  effect.  They  are  the 
effect  of  such  a  distribution  of  money  as  we  see  in  France, 
where,  because  money  is  distributed  in  the  tracks  of  com- 
merce in  every  producer's  (that  is  to  say,  holder's)  hands, 
an  excessive  and  undue  expansion  of  its  use  (that  is  to  say, 
its  circulartion)  cannot  take  place,  as  it  may  and  does  take 
place  where  it  is  consolidated  in  a  series  of  reserves,  as  in 
banks  in  the  United  States  and  England,  which  are  not  re- 
quired to  keep  any  definite  reserve.  Money  being  a  sub- 
stitute commodity,  or  a  substitute  put  in  the  place  of  a 
commodity,  and  naturally  distributed  in  proportion  to  the 


244 


POLITICAL  ECONOMY. 


distribution  of  commodities  (that  is  to  say,  of  commerce), 
this  distribution  may  be  artificially  or  forcibly  disturbed, 
and  so  far  production  will  be  disturbed  by  the  variation 
of  prices.  The  rise  of  prices  will,  for  a  short  time,  and  while 
it  is  going  on,  make  production,  especially  of  luxuries,  profit- 
able, but  it  cannot  last  long.  Again,  one  or  more  articles  of 
merchandise  may  be  advanced  in  price  by  speculative  pur- 
chases and  sales  on  credit.  The  recoil  of  prices  and  the 
resulting  losses  in  such  a  case  Mr.  Mill  calls  a  commercial 
crisis ;  and  such  it  is  in  a  minor  sense,  but  it  is  very  far 
from  being  a  crisis  with  commercial,  industrial,  and  banking 
phases.  It  is  a  simple  and  not  a  complex  affair.  Mr.  Mill 
has  confounded  the  two  by  confounding  their  causes.  He 
makes  credit  the  cause  of  all  crises,  whereas  the  speculative 
sales  and  purchases  of  one  or  more  articles  of  commerce, 
like  tea  and  sugar,  on  personal  credit,  are  wholly  different 
from  a  crisis  which,  having  first  carried  up  the  prices  of  all 
articles  of  commerce,  ends  by  carrying  some  of  them  very 
much  and  all  more  or  less  down.  Credit  sales,  as  I  have 
demonstrated,  raise  only  the  price  of  the  merchandise  sold 
on  credit,  and  not  general  prices,  because  they  give  no  ex- 
tra circulation  to  money ;  production  on  credit  cannot  be 
carried  on  without  loans  of  money,  which  increase  its  cir- 
culation precisely  in  proportion  to  the  excess  of  that  pro- 
duction, and  therefore  precisely  to  that  extent  in  advance 
of  consumption  ;  and  this  produces  what  is  called  bank  debt. 
This  increase  of  circulation  does  not  act  upon  the  price  of 
one  article  of  merchandise  alone,  but  it  raises  all  prices; 
hence  it  raises  not  only  the  price  of  the  necessaries  of  life, 
but,  while  it  is  going  on,  even  the  price  of  the  articles  over- 
produced, giving  it  the  semblance  of  a  real  rise.  The  diffi- 
culty with  Mr.  Mill's  analysis  is,  that  he  did  not  carry  it  far 
enough  to  discover  what  causes  a  rise  or  fall  6i  general 
prices,  and  in  fact  not  even  far  enough  to  discover  that  there 
is  such  a  thing  as  a  general  rise  of  prices  as  distinguished 
from  the  rise  of  price  of  only  one  or  two  articles,  or  any 
number  less  than  all;  nevertheless  he  is  an  able  writer, 
and  he  has  illustrated  some  important  truths.    But  there  is 


PRODUCTION,  OVERPRODUCTION,  ETC. 


245 


still  another  speculative  rise  of  prices,  which  may  occur  in 
part  from  other  causes  than  overproduction.  A  sudden  rise 
may  occur  by  reason  of  war  or  apprehended  scarcity,  but  it 
hardly  constitutes  an  exception.  A  general  rise  of  prices 
cannot  be  maintained  long,  unless  there  is  an  increased  cir- 
culation through  new  loans,  which  imply  new  production,  or 
issues  of  inconvertible  government  paper.  A  rise  embracing 
nearly  all  articles  might  be,  and  has  been,  maintained  for 
some  time  by  the  aid  of  credit,  where  ports  have  been  par- 
tially or  wholly  closed  by  war  ;  but  in  time  of  peace,  with 
open  ports  and  free  internal  intercourse,  the  only  cause  of  a 
rising  scale  of  general  prices,  in  the  absence  of  government 
issues,  is  a  rising  scale  of  production  in  one  quarter  out  of 
proportion  with  production  in  another  quarter,  sustained  by 
bank  loans  or  by  inconvertible  or  imperfectly  convertible 
bank-notes,  but  for  the  most  part  by  bank  loans. 

The  grand  social  problem  of  the  day  is  to  discover  the 
cause  of  inharmonious  production ;  to  find  out  why  it  is  that 
the  absolute  necessaries  of  life,  never  being  overproduced,  the 
relative  necessaries  are  periodically  overproduced,  and  why, 
while  being  overproduced,  instead  of  at  once  falling  off  in 
price  they  rise,  on  the  contrary,  in  price,  and  carry  all  other 
prices  with  them  until  the  cycle  is  completed  with  a  com- 
mercial, industrial,  and  banking  crisis.  If  it  were  not  an 
extremely  difficult  and  complicated  problem  it  would  have 
been  solved  ere  this.  The  constant  repetition  of  the  ab- 
straction that  there  can  be  no  overproduction  has,  from  the 
exceedingly  complex  developments  of  money  and  banking, 
served  to  keep  investigators  back,  but  the  paramount  diffi- 
culty has  arisen  from  mistaking  one  very  important  effect 
for  sole  cause,  the  cause  being  masked  by  the  exclusive  use 
of  monetary  terms.  Because  great  losses  result  from  want 
of  harmony  in  production,  it  is  said  that  a  crisis  arises  from 
unproductive  consumption.  This  I  have  demonstrated  in 
various  forms  to  be  an  error. 

From  1865  up  to  1873  vast  numbers  of  workmen  in  Great 
Britain  and  the  United  States  were  employed  in  making  pig 


246 


POLITICAL  ECONOMY. 


iron,  iron  bars,  cloth,  lumber  and  building  materials,  and 
during  this  time  they  were  fed  and  clothed,  and  consumed  a 
much  larger  proportion  of  absolute  than  of  relative  necessa- 
ries ;  and  the  products  of  their  labor  being  demonstrated  at 
last  to  be  in  relative  excess,  brought  on  a  crisis.  The  United 
States  exported  enough  of  the  absolute  necessaries  of  life, 
and  articles  which  cost  absolute  necessaries,  to  pay  for  the 
articles  of  relative  necessity  imported.  These  relative  nec- 
essaries imported  cost,  for  the  most  part,  directly  or  indi- 
rectly, absolute  necessaries  exported :  ^  the  absolute  were  ex- 
changed for  relative  necessaries.  Precisely  such  was  the  case 
with  the  absolute  necessaries  marketed  at  home :  they  were 
exchanged  for  relative  necessaries  of  home  production,  and 
after  the  exchange  was  completed,  no  more  absolute  necessa- 
ries were  left  to  exchange,  but  a  large  surplus  of  the  relative 
was  left  on  hand,  with  an  ability  to  create  a  much  larger  sur- 
plus ;  and  this  was  the  crisis.  Now  to  determine  with  absolute 
certainty  whether  unproductive  consumption  is  the  cause  of 
a  crisis  is  very  easy  from  the  analysis  I  have  made.  Unpro- 
ductive consumption  is  loss,  but  loss  is  not  the  cause  of  the 
crisis  :  loss,  on  the  contrary,  is  developed  by  and  results  from 
the  crisis.  The  crisis  gives  note  of  its  approach  before  it 
comes,  and  when  it  comes  years  may  be  required  to  demon- 
strate all  its  effects,  as  mercantile  failures  long  postponed, 
and  now  taking  place  in  1877  in  the  United  States,  are 
daily  showing.  Therefore,  to  say  that  loss  having  resulted 
from  'the  crisis,  the  crisis  having  resulted  from  overstock, 
and  overstock  having  occurred  by  the  instrumentality  of  pro- 
ducers, who,  by  aid  of  bank  loans,  have  obtained  the  absolute 
necessaries  of  life  on  credit,  and  the  relative  necessaries  they 
have  meantime  consumed  by  an  exchange  of  credits  with 
each  other,  this  final  result  in  loss  is  the  primary  cause  of  the 
loss  itself,  is  to  affirm  that  the  final  result  is  the  cause  of  the 
final  result.  It  is  impossible  to  understand  so  complex  a 
matter  without  stating  the  case  as  it  is  plainly,  and  tracing 
back  from  the  effects  to  the  primary  cause,  and  then  showing 

1  Cotton  exported  cost  absolute  necessaries  consumed  by  the  producers  of  the 
cotton  and  their  laborers. 


PRODUCTION,  OVERPRODUCTION,  ETC. 


247 


what  the  case  would  have  been  had  the  primary  cause  never 
been  in  operation.  Thus,  overstock  being  the  cause  of  the 
crisis,  the  producers  of  raw  material  and  finished  product, 
and  their  laborers  and  operatives,  have  expended  in  living 
the  cost  of  the  overproduction,  less  say  five  per  cent.  Had 
there  been  no  artificial  and  unduly  stimulated  demand  for 
their  product  by  means  of  loans,  there  would  have  been  no 
rising  scale  of  prices  and  therefore  no  overstock.  There 
being  in  that  case  no  overstock,  the  surplus  of  laborers  and 
operatives  who  have  made  it  would  have,  if  living  themselves, 
been  earning  a  living  at  some  other  employment,  and  that 
employment  would  have  been  the  production  of  absolute 
necessaries,  for  it  could  by  no  possibility  have  been  anything 
else.  This  would  have  been  attended  with  a  greater  abun- 
dance and  hence  cheapening  of  the  absolute  necessaries  of 
life';  a  more  regular  and  even  supply  of  the  relative  neces- 
saries and  steady  prices ;  the  exchanges  would  have  been  in 
harmony,  because  after  making  them  there  would  be  no  over- 
stock in  any  quarter. 

As  it  is  impossible  to  have  any  true  conceptions  of  the 
reasons  why  gold  and  silver  coin,  if  its  circulation  is  left  to 
take  its  natural  course,  following  the  tracks  of  the  commer- 
cial distribution  of  commodities  effected  by  its  agency,  and 
without  banks  to  increase  artificially  its  circulation,  is  the 
steadiest  and  safest  of  all  currencies,  without  understanding 
how  and  why  that  steadiness  is  promoted  by  metallic  coin 
being  the  money  of  the  whole  commercial  world,  so  it  is 
equally  impossible  to  understand  how  and  why  the  distribu- 
tion of  commodities  is  disturbed  through  overstock,  without 
taking  into  account  the  exchanges  between  portions  of  the 
country  having  overstock,  and  between  that  country  and 
the  rest  of  the  commercial  world.  The  United  States  would 
have  suffered  much  less  from  overstock  if,  prior  to  1873, 
they  had  imported  only  one  third  of  the  actual  imports  of 
iron,  of  cloth,  and  dress  goods,  and  produced  that  amount 
at  home  or  dispensed  with  it.  So  if  they  had  produced  at 
home  only  one  third  of  the  actual  product,  and  imported 
from  abroad  only  to  the  extent  of  the  remainder,  or  dis- 


248 


POLITICAL  ECONOMY. 


pensed  with  it,  the  crisis  would  have  been  slight,  because 
in  both  cases  little  or  no  overstock  would  have  remained  in 
the  hands  of  merchants  and  other  producers  in  the  United 
States.  Hence  it  follows,  that  in  respect  solely  to  the  mat- 
ter of  overstock,  which  is  the  cause  of  crises,  it  is  immaterial 
whether  the  relative  necessaries  for  which  the  absolute  neces- 
saries are  exchanged  are  produced  at  home  or  abroad,  pro- 
vided always  there  is  no  overstock  at  home  after  the  ex- 
changes are  made,  unless  it  is  soon  worked  off  and  not  allowed 
to  accumulate.  It  follows  further,  that  an  agricultural  na- 
tion, or  one  whose  principal  business  is  agriculture,  can  never 
suffer  from  a  crisis,  and  that  in  the  country  where  overstock 
gives  rise  to  a  crisis  the  overstock  may  have  arisen  from  the 
want  of  consumers  either  at  home  or  abroad.  In  Great  Brit- 
ain the  present  commercial  crisis  arose  from  want  of  customers 
abroad ;  in  the  United  States  it  arose  from  want  of  customers 
at  home.  The  advantage,  in  the  United  States,  of  home 
protection  by  tariff  was  almost  annihilated  by  the  expansion 
of  prices  (in  the  rising  scale)  of  the  domestic  as  compared 
with  those  of  the  foreign  article.  Prices  in  England,  it  is 
true,  were  at  the  same  time  in  the  rising  scale,  but  they  were 
limited  by  convertibility.  Had  English  prices  been  kept 
steady  by  a  steady  circulation,  England  would  have  produced 
more  steadily  at  steady  prices,  and  the  United  States  would 
have  lost  less ;  whereas,  by  exchanging  their  debt,  which  col- 
lects a  heavy  tax  annually  from  the  people  of  the  United 
States,  for  poor  iron  at  enormous  prices,  and  for  other  goods 
not  needed,  they  have  impoverished  themselves  while  she  has 
lost  by  overproduction,  and  there  has  been  no  fair  exchange. 
The  question  of  tariff  is  entirely  subordinate :  it  is  as  the 
strength  of  the  child  against  that  of  the  giant.  It  follows, 
also,  that  if  there  be  any  cause  of  grievance  it  is  Capital 
against  Labor,  not  Labor  against  Capital.  It  is  childish  — 
at  least  it  seems  childish  —  to  speak  of  such  a  cause,  but  im- 
agination is  sometimes  stronger  than  fact.  Take  the  North- 
ern Pacific  Railroad,  as  an  example.  Widows,  clergymen, 
bank  officers,  merchants  and  their  clerks,  farmers  and  opera- 
tives of  all  sorts,  invested  their  means  in  this  enterprise  ; 


\ 


PEODUCTION,  OVERPRODUCTION,  ETC. 


249 


and  what  did  their  means  consist  of?  Largely  ot  money- 
obtained  for  United  States  six  per  cents.  And  how  did  they 
obtain  the  six  per  cents  ?  With  money  taken  in  exchange 
for  labor,  services,  merchandise,  and  absolute  necessaries  of 
life.  These  were  freely  given  to  support  the  laborers  who 
made  pig  iron,  rails  and  road-bed,  in  exchange  for  their 
work.  It  was  nearly  a  dead  loss  of  capital  to  support  labor 
in  producing  an  article  in  excess.  Is  capital  to  be  blamed 
for  doing  so  ?  Is  labor  to  be  blamed  for  doing  so  ?  Both 
were  stimulated  by  forces  more  potent  in  moving  than  they 
in  resisting,  but  the  dead  loss  fell  on  capital,  for  that  has 
had  nothing  in  return  ;  labor  had  its  support,  which  is  ninety- 
five  one-hundredths  of  the  average  reward  labor  of  all  kinds, 
both  of  body  and  mind,  obtains.  If  there  be  any  cause  of 
complaint,  common  to  both  labor  and  capital,  it  is  the  fact 
that  the  whole  subject  is  so  complex,  the  active  causes  of 
derangement  so  masked,  and  the  forces  in  operation  so  diffi- 
cult to  master,  that  a  remedy  has  not  yet  appeared. 


CHAPTER  IX. 

INTEREST,  KENT,  AND  TAXES. 

Interest  and  rent  are  generally  treated  separately,  but 
they  are  both  return  made  to  the  lender  for  the  use  of  his 
capital.  Interest  properly  includes  discount,  for  discount  is 
interest  in  advance,  and  both  are  the  designated  profits  of 
the  lender  paid  by  the  producer  as  the  lender's  fixed  share 
for  the  capital  he  advances.  Money,  it  is  true,  is  not  real 
capital  any  more  than  it  is  a  real  commodity  ;  but  as  real 
commodities  not  yet  sold  to  consumers  may  be  regarded  as 
capital,  so  the  conventional  commodity  money,  which  takes 
the  place  of  a  real  commodity,  may  also  be  called  conven- 
tional capital.  It  is  the  quantity  of  commodities  or  mer- 
chandise not  yet  designated  because  not  yet  purchased,  and 
not  yet  valued  because  not  yet  sold,  which  constitutes  the 
capital  always  ready  to  be  exchanged  by  the  commercial 
world  for  all  the  money  in  each  holder's  hands.  Until  such 
purchase  and  sale  take  place,  the  money  is  not  real  capital  to 
the  holder,  but  the  merchandise,  always  ready  to  be  ex- 
changed for  it,  is  ;  and  when  exchanged,  the  latter  reduces 
by  so  much  the  capital  of  the  seller,  and  enlarges  by  so  much 
the  capital  of  the  buyer,  unless  purchased  for  consumption, 
and  in  that  case  it  is  so  much  capital  consumed.  Whether 
the  money  be  metal,  paper  convertible  into  metal,  or  paper 
inconvertible,  but  nevertheless  universally  current,  makes 
no  difference,  except  as  to  the  purchasing  power  of  the  dif- 
ferent kinds  of  money  and  the  relative  steadiness  of  prices. 
Whoever  pays  tax  upon  money  pays  tax  upon  conventional 
capital  which  produces  nothing  itself,  and  which  by  no  pos- 
sibility can  produce  anything.  The  daily  average  amount 
of  money  in  the  possession  of  each  individual,  therefore, 


INTEREST,  RENT,  AND  TAXES. 


251 


which  constitutes  nearly  all  the  money  there  is,  is  so  much 
unproductive  capital  in  itself,  —  absolutely  essential,  never- 
theless, for  the  transfer  of  capital  and  its  fruits.  It  follows 
that  money  loaned,  for  which  a  bill  or  note  secured  by  quick 
capital,  or  a  mortgage  secured  by  fixed  capital,  is  given  to 
the  lender  by  the  borrower,  while  it  is  in  the  hands  of  the 
lender  or  borrower,  is  unproductive  capital  altogether,  and 
such  is  also  the  mere  bill,  note,  or  mortgage  considered  by 
itself  as  evidence  of  title.  If  real  capital,  which  is  produc- 
tive, ought  alone  to  be  taxed,  either  all  debts  receivable  and 
all  money  on  hand  should  be  deducted,  taxing  only  the  tan- 
gible and  real  capital,  or  all  debts  payable  and  all  money 
on  hand  deducted  from  the  total  of  real  capital  and  debts 
receivable,  taxing  only  the  remainder.  The  latter  would  be 
the  most  just,  because  the  holders  of  all  debt  have  in  fact 
a  charge  upon  real  capital  for  interest  and  principal,  subject 
to  contingencies,  which  ought  to  be  estimated  and  allowed 
in  making  assessments.  The  question  of  equal  and  just 
taxation  has  an  important  bearing  on  the  question  of  inter- 
est, and  I  have  therefore  examined  it  here. 

The  unequal  and  unjust  discriminations  against  banking 
capital  at  this  time  must  be  at  least  partially  compensated 
by  interest. 

Ought  banking  capital  in  the  shape  of  money  and  loans 
to  be  taxed  at  all  ?  Surely  not,  if  money  at  interest  on 
mortgage  or  personal  security  ought  to  go  free.  Money 
produces  nothing,  but  mortgages  do.  Taxes  may  be  assessed 
against  capital  instead  of  income,  but  income  pays  them  for 
the  most  part,  and  that  which  pays  is  that  which  ought  to 
be  assessed.  The  whole  question  resolves  itself  into  one  of 
income  at  last.  If  income  alone  be  taxed,  the  way  is  plain  ; 
but  if  capital  be  taxed,  debts  receivable,  including  mortgages, 
together  with  all  other  capital  minus  all  cash  on  hand  and  all 
debts  payable,  would  furnish  the  true  amount  for  taxation, 
and  would  bear  most  equally  upon  the  receivers  and  payers 
of  interest.  The  possession  of  money,  then,  being  the  evi- 
dence of  an  unexercised  right  in  the  holder  to  its  equivalent 
in  real  capital,  he,  by  a  loan,  parts  with  that  right  to  a  bor- 


252 


POLITICAL  ECONOMY. 


rower,  who  exercises  it  in  his  stead,  and  who,  agreeably  to 
the  demonstration  in  the  chapter  on  Production,  and  demon- 
strations in  other  forms  in  other  chapters,  is  always  a  pro- 
ducer, or  puts  himself  in  the  place  of  a  producer,  except  in 
cases  of  fraud  or  accident.  Hence  we  may  say  that  interest 
is  the  guarantied  rate  of  profit  promised  by  the  borrowing 
producer  to  his  partner,  the  lender,  for  the  use  of  his  con- 
ventional capital,  called  money,  that  capital  being  at  the 
same  time  guarantied  likewise.  If  interest  is  prepaid  in  the 
form  of  discount,  the  lender's  share  of  profits  is  not  only 
guarantied,  but  paid  in  advance. 

THE  DIFFERENT  KINDS  OF  INTEREST. 

Interest  is  of  four  kinds  :  1st,  that  paid  on  productive  real 
estate  in  the  shape  of  farming  lands,  for  money  loaned  ;  2d, 
that  paid  on  purchase-money  of  such  lands ;  3d,  that  paid  on 
other  land ;  4th,  that  paid  on  loans  made  from  capitalists 
and  banks  for  all  other  purposes. 

The  first  and  the  second  kinds  of  interest  resolve  them- 
selves into  one,  and  the  third  differs  in  no  essential  particu- 
lars from  either,  because,  as  shown  in  the  chapter  on  Produc- 
tion and  the  chapter  on  Bank  Credit,  the  chief  business  of 
the  civilized  world  is  to  produce  by  labor,  acting  upon  capi- 
tal, aided  by  natural  elements  and  forces,  and  to  distribute 
by  means  of  exchanges  the  resulting  fruits  which,  until  pur- 
chased for  consumption,  may  be  called  capital.  Production 
is  all  the  time  taking  place,  and  continually  adding  value  to 
these  fruits,  until  the  last  change  in  quality  and  location 
takes  place,  and  the  fruits  are  exchanged  for  actual  consump- 
tion. The  chief  business  of  the  world  is  to  produce  and 
exchange,  and  therefore  the  office  of  money  is  to  exchange 
commodities,  and  labor  and  commodities,  for  itself  as  the 
universal  conventional  commodity  in  the  shape  of  units  of 
value,  purchase,  and  payment,  as  already  shown.  To  pur- 
chase fixed  capital  in  the  shape  of  land,  and  to  loan  money 
upon  its  security,  are  therefore  only  incidental  and  occasional 
performances  in  this  grand  drama  of  perpetual  production 
and  distribution.    The  money  in  such  cases  in  the  United 


INTEREST,  RENT,  AND  TAXES. 


253 


States  is  loaned  to  purchase  the  land,  or  to  pay  installments 
of  principal  and  interest  due  or  about  to  become  due  upon 
it.  When  occasionally  loaned  for  other  purposes,  it  is  mostly 
to  pay  for  lasting  improvements  or  labor,  to  increase  the 
product.  When  the  latter  is  the  case,  however,  the  produce 
can  now  always  command  a  market ;  and  as  there  can  be 
no  overproduction  of  absolute  necessaries,  there  is  no  undue 
expansion  of  circulation  through  the  loan.  The  lender  in 
this  case  is  not  a  partner  of  the  borrower  while  the  security 
is  under  all  contingencies  .sufficient  to  pay  interest  as  well  as 
principal ;  but  when  it  is  not,  he  is,  because  he  must  then 
rely,  not  only  upon  the  capital,  but  also  upon  the  skill  and 
good  fortune  of  the  borrower,  as  a  producer  in  other  respects. 
Loans  of  this  kind,  however,  being  on  the  whole  subject  to 
fewer  contingencies  than  others,  the  rate  of  interest  is  sub- 
ject to  less  fluctuation  than  in  other  cases.  Interest  being 
paid,  moreover,  out  of  the  rents  or  profits  of  the  real  estate 
mortgaged  or  sold,  and  the  profits  of  land  being  steadier 
than  the  profits  of  other  business,  it  follows,  for  this  addi- 
tional reason,  that  the  fact  must  be  as  stated.  When  the 
profits  of  farming  land  are  large,  and  the  increase  in  value 
rapid,  as  in  the  United  States,  the  rate  of  interest  on  mort- 
gages must  necessarily  rule  high,  although  capital  may  be 
abundant. 

Production  being  only  sufficient  to  support  the  producer 
and  his  coadjutors  the  laborers,  and  restore  the  waste  of 
capital,  with  a  small  margin  of  profit,  interest  chargeable  to 
real  estate,  unless  paid  out  of  capital,  must  be  paid  out  of 
the  margin  of  profit.  The  rate  of  interest  will  therefore 
depend  upon  the  amount  of  that  margin,  relative  abundance 
or  scarcity  of  loanable  capital  seeking  a  market,  relative  de- 
mand for  money  to  be  loaned,  and  relative  increase  or  de- 
crease taking  place  in  the  value  of  land.  Where  railroads 
are  being  constructed  at  high  prices  for  labor  and  material, 
and  on  routes  that  will  not  pay  interest  on  cost,  the  immense 
losses  which  fall  upon  the  projectors  and  builders  are  in 
a  national  point  of  view  compensated,  mostly  by  the  rise  of 
land  in  the  neighborhood.    The  real  national  loss  resulting 


254 


POLITICAL  ECONOMY. 


in  the  case,  therefore,  lies  in  building  too  soon  for  profit  what 
would  in  the  lapse  of  a  few  years  be  built  with  profit  to  all. 
There  is  also  in  a  moral  point  of  view  a  loss,  resulting  from 
the  bankruptcy  of  the  projectors  and  the  turning  away  of 
laborers  when  a  crisis  arrives  ;  prosperity  is  not  an  absolute 
but  a  relative  affair. 

It  is  impossible  to  understand  political  economy  or  social 
science  without  taking  into  account  all  the  effects  of  bank- 
ruptcy and  want  of  employment,  as  well  as  the  causes.  They 
tell  immediately  upon  production,  and  thus  discount  the  cer- 
tain prospects  of  the  future.  The  cost  of  the  roads  reappears 
as  a  credit  in  the  enhanced  value  of  land ;  the  loss  is  there- 
fore not  actual  for  to-day,  so  far  as  there  is  to-day,  on  the 
footings  of  total  national  capital,  no  loss;  but  to-morrow 
there  will  be  a  relative  loss,  consisting  of  the  difference  be- 
tween what  are  and  what  might  have  been  the  footings  of 
capital. 

Interest  chargeable  to  land  being  payable  out  of  the  mar- 
gin of  profits,  rent  must  be  payable  out  of  the  same  fund, 
and  its  rate  will  depend  upon  the  same  causes.  As  land 
rises  in  value  by  purchases,  settlement,  and  markets  opened 
by  railroads,  rents  rise  ;  as  they  fall  in  value  (in  the  older 
settlements,  for  instance),  rents  fall. 

TAXES. 

Taxes,  whether  levied  in  the  shape  of  internal,  export,  or 
import  duties,  upon  general  assessment,  upon  manufactures, 
upon  sales,  or  by  excise,  are  chargeable  to  the  margin 
of  profits  of  land  before  mentioned,  and  to  the  margin  of 
profits  of  all  other  kinds  of  production.  If  a  fair  estimate  of 
the  net  margin,  after  deducting  all  consumption,  be  five  per 
cent.,  and  the  total  average  of  all  taxes,  national,  state, 
county,  city,  and  town,  be  two  per  cent.,  out  of  a  gross  prod- 
uct of  ten  per  cent.,  taxation  absorbs  two  fifths  of  all  that  is 
left.  This  is  an  enormous  draft  upon  the  fund.  Do  rent 
and  interest  in  the  hand  of  the  landlord  and  "moneyed" 
capitalist,  or  does  the  margin  of  profits,  before  leaving  the 
producer's  hands,  pay  the  larger  share  of  it  ?    This  depends 


INTEREST,  RENT,  AND  TAXES. 


255 


upon  tlie  relative  activity  of  the  elements  before  mentioned, 
and  the  diflBculties  of  assessment.  Some  sixty  and  odd  mill- 
ions of  United  States  four  per  cents  have  been  of  late  sub- 
scribed for  and  taken  in  the  United  States,  which,  had  they 
been  liable  to  taxation,  would  scarcely  have  been  taken  at 
five  and  a  half  per  cent.  In  order  to  understand  where  and 
how  the  weight  of  taxation  bears,  it  is  necessary  first  to  study 
production  and  exchange.  Production  cannot  be  carried  in 
any  quarter  far  beyond  the  ability  to  exchange  without  a 
crisis,  and  with  the  crisis  comes  bankruptcy  and  loss  in  the 
quarter  where  exchanges  cannot  be  made.  But  this  inabil- 
ity to  exchange  never  falls  upon  the  product  of  that  portion 
of  land  devoted  to  the  production  of  the  absolute  necessaries 
of  life.  Again,  the  consumers  of  products  bought  with  taxes 
consume  most,  in  proportion,  of  those  products  which  are 
necessaries  of  life.  Hence  it  follows  that  although  the  rela- 
tive activity  of  the  elements  before  mentioned  would,  unin- 
fluenced by  any  other  cause,  throw  the  weight  of  taxation 
sometimes  into  the  one  and  sometimes  the  other  scale,  never- 
theless the  counteracting  causes  before  mentioned  —  constant 
ability  to  exchange,  and  hence  stability  and  permanence  of 
margin  of  profit,  and  greater  relative  consumption  by  con- 
sumers—  necessarily  throw  the  greatest  weight  of  taxation 
upon  land  devoted  to  that  kind  of  production. 

Before  a  crisis,  when  the  production  of  the  relative  neces- 
saries is  in  excess  and  prices  are  high,  the  appearance  of 
prosperity  gives  a  high  apparent  value  to  the  capital  engaged 
in  that  kind  of  production,  and  it  pays  not  more  than  its  ap- 
parent share,  but  more  than  it  is  able  to  bear  of  taxation ; 
and  when,  through  bankruptcy,  its  inability  to  pay  so  much 
is  demonstrated,  the  weight  of  taxation  then  taken  from  it  is 
carried  to  land ;  the  economy  that  follows  is  abstinence,  not 
so  much  from  the  absolute  as  the  relative  necessaries  of  life, 
until  equilibrium  is  restored.  Land,  then,  being  most  able 
to  bear  the  burden,  apparently  part  of  the  time,  and  actually 
all  the  time,  bears  the  largest  proportion  of  it.  This  result- 
ing depletion  diminishes  the  margin,  and  reduces  by  that 
amount  the  fund  out  of  which  interest  and  rent  are  payable  ; 


256 


POLITICAL  ECONOMY. 


and  the  tendencjf  must  be  to  a  division  of  this  loss  between 
them. 

Interest  and  rent  are  payable  out  of  the  same  fund,  but 
taxes,  whatever  shape  they  assume,  must  be  paid  first  out  of 
the  same  fund,  and  can  be  paid  only  where  there  is  ability  to 
pay,  and,  on  the  whole,  leaving  out  falsehood,  fraud,  and  in- 
ability to  make  just  assessments,  in  proportion  to  ability. 
The  ancient  dispute  about  protection  of  capital  devoted  to 
the  production  of  the  relative  necessaries  of  life  is  not  as  im- 
portant, then,  as  is  sometimes  supposed.  Given  the  revenue 
which  must  be  collected,  the  larger  the  amount  the  less  there 
will  be  left  to  exchange  between  the  producers  of  absolute 
and  relative  necessaries  after  the  collection  is  made,  and  in 
the  end. the  loss  will  be  distributed.  Before  this  final  distri- 
bution takes  place,  however,  an  immediate  and  direct  loss 
falls  upon  the  consumer  of  those  things  taxed  the  highest ; 
and  as  a  stimulus  to  the  production  of  those  things  up  to  a 
certain  point  this  may  be  an  advantage,  provided  increased 
production  in  this  direction  be  desirable ;  but  in  order  to 
have  any  effect  prices  must  be  kept  steady  by  a  stable  cur- 
rency, otherwise  the  loss  is  greater  than  the  gain.  Taxes, 
moreover,  falling  upon  production,  for  the  most  part  money 
at  interest  and  secured  by  land,  may  well  be  taxed  to  the 
owner  of  the  resulting  debt,  wherever  he  resides,  but  the  tax- 
ation should  never  fall  but  once.  Indebtedness  of  all  kinds 
ought  to  be  deducted,  and  a  net  assessment  of  the  remainder 
only  made.  If  we  assume  that  it  ought  not  to  be  deducted, 
as  a  matter  of  justice  as  well  as  of  state  right  and  sover- 
eignty, then  undoubtedly  the  money  at  interest  ought  not  to 
be  taxed  wherever  the  creditor  may  reside ;  but  the  pre- 
mises assumed  are  false,  because  the  interest  and  principal 
are  paid  mostly  out  of  the  margin  of  net  profits  before  men- 
tioned, as  well  as  the  taxes ;  and  no  loss  of  capital  for  pur- 
poses of  taxation  occurs  to  the  state  where  the  lands  lie  by 
allowing  the  land-holder  to  deduct  the  debt,  because  by  the 
loan  he  has  brought  into  the  state  for  taxation  as  much  as  is 
lost  for  the  time  to  taxation.  The  only  difference  is  that 
what  he  has  thus  brought  in,  unless  laid  out  in  permanent 


INTEREST,  RENT,  AND  TAXES. 


257 


improvements  upon  land,  is  not  as  sure  and  unfailing  a 
source  of  revenue  as  the  land  itself ;  but  this  is  one  of  the 
necessary  incidents  of  commerce  and  intercourse,  and  loss 
and  gain  of  productive  capital  for  purposes  of  taxation  are 
on  the  whole  distributed  fairly. 

ESTTEREST  PAID  BY  PRODUCERS  ON  CREDIT. 

It  remains  to  examine  the  subject  of  interest  paid  by  pro- 
ducers of  the  relative  necessaries  of  life,  who  borrow  upon 
the  credit  of  what  seems  to  be  quick  capital  in  the  shape  of 
money,  and  then  produce  on  credit. 

It  has  been  demonstrated  already  in  the  chapter  on  Pro- 
duction and  elsewhere,  that  loans  are  made  to  actual  produc- 
ers, with  few  exceptions  ;  and  such  is  undoubtedly  the  case. 
Whoever  buys  raw  material  and  labor,  and  by  the  action  of 
the  latter  force  upon  the  material  produces  a  new  commodity 
or  a  new  result,  produces  upon  the  strength  of  his  own  capital, 
if  he  does  not  borrow  ;  and  there  is  no  danger,  so  far,  of  any 
material  overproduction,  ill-directed  production,  inharmoni- 
ous production,  or  by  whatever  other  name  it  may  be  called. 
Such  production  can  lead  to  no  crisis,  industrial,  commercial, 
or  banking,  because  such  a  crisis  results  from  debt,  and  debt 
comes  from  inability  to  sell  the  products  of  labor.  Bat  when 
the  production  has  been  carried  on  by  the  aid  of  loans,  in 
whole  or  part,  and  sales  cannot  be  made  to  pay  all  the  money 
loaned  when  due,  —  whether  the  money  were  borrowed  in 
gold  eagles,  bank-notes,  or  what  is  erroneously  called  bank 
credit  makes  no  sort  of  difference,  —  the  production  has  cer- 
tainly taken  place  on  credit  and  confidence  of  future  sales ; 
and  it  is  as  certain  that  wherever  production  has  taken  place 
by  means  of  bank  loans,  the  banks  have  thus  given  the 
money  loaned  a  credit  circulation.  Instead  of  holding  the 
money  they  loan  as  producers  and  capitalists,  either  actually 
or  representatively,  they  hold  it  only  as  depositaries,  subject 
at  all  times  to  the  call  of  the  depositing  capitalist,  who  loans 
the  same  amount  out  of  his  bank  balance,  by  means  of  checks, 
as  he  would  do  out  of  his  strong  box  or  safe.  Bank  loans 
are,  therefore,  so  much  in  excess  of  all  loans  possible,  were 

17 


258 


POLITICAL  ECONOMY. 


there  no  banks.  Hence  the  additional  circulation  they  give 
money  through  their  loans  is  a  circulation  on  their  own 
credit,  and  not  a  circulation  of  their  credit.  Were  there 
no  such  thing  as  money,  were  all  exchanges  of  commodities 
freely  and  directly  made,  and  were  there  bankers  who  re- 
ceived and  delivered  the  commodities  belonging  to  capital- 
ists, the  deliveries  of  commodities  being  made  upon  the 
checks  of  the  capitalists  as  they  loaned  from  time  to  time, 
it  would  be  impossible  for  the  bankers  to  make  any,  cer- 
tainly but  a  small  amount  of  loans  on  their  own  account, 
because  the  commodities  withdrawn  by  borrowers  would  be 
consumed  by  them  and  their  workmen,  and  not  to  any  great 
extent  redeposited  like  money.  In  these  cases,  however, 
the  borrowers  from  the  banks  would  certainly  produce  upon 
credit,  however  small  the  amount  might  be,  because  they 
borrow  upon  credit  from  them  as  they  did  from  the  cap- 
italists. Precisely  so  with  a  metallic  currency  or  any  kind 
of  currency  without  banks.  The  borrowers  receive  gold  and 
silver,  which  have  been  paid  by  consumers  to  producers  for 
an  equal  amount  of  commodittes  which  have  gone  into  con- 
sumption, and  may  therefore  now  be  reproduced  to  fill  the 
void  thus  created,  without  any  expansion  of  production  be- 
yond the  volume  existing  before  they  had  gone  into  con- 
sumption. If,  however,  any  additional  loans,  over  and  above 
the  vokime  sufficient  to  fill  this  void,  take  place  by  the  aid 
of  banks,  it  follows  from  the  premises,  with  absolute  cer- 
tainty, that  the  void  is  more  than  filled  ;  and  not  only  is  the 
resulting  production  like  that  arising  from  all  loans  on  credit, 
but  the  banks  making  the  loans,  even  if  they  pay  out  gold 
and  silver,  loan  upon  credit,  or  more  properly,  as  partners 
of  the  borrowers,  have  taken  upon  themselves  jointly  with 
them  the  business  of  producing  upon  credit  in  excess  of  act- 
ual consumption.  As  loans  increase,  they  continue  to  in- 
crease the  volume  of  production  more  and  more  in  excess  of 
the  amount,  sufficient  to  fill  the  void  created  by  consumption. 
The  interest  paid  to  banks  upon  loans  is,  like  all  other  inter- 
est, payable  out  of  the  margin  of  profits.  It  is  a  guarantied 
share  of  the  profits,  and  usually  prepaid  in  discount.  As 


INTEREST,  RENT,  AND  TAXES. 


259 


shown  already  in  the  chapter  on  Pi;odnction,  the  scale  of  pro- 
duction and  the  scale  of  bank  loans  rise  and  fall  together. 
Want  of  harmony  in  the  grand  field  of  total  production  is 
the  result ;  rising  prices  look  like  the  evidence  of  rising  prof- 
its, but  turn  to  real  losses  in  the  end.  Such  being  the  fate 
of  production  in  the  quarter  where  bank  loans  are  used, 
such  must  necessarily  be  the  fate  of  interest  which  is  paid, 
if  at  all,  out  of  the  loans  which  cause  such  production. 

When  bank  loans  are  steady  at  the  end  of  the  descending 
scale,  and  before  the  commencement  of  the  rising  scale,  in- 
terest is  steady ;  when  loans  rise  interest  rises,  because  the 
joint  fund  of  profits  rises.  But  when  a  crisis  is  impending 
and  threatening,  interest  is  no  longer  determined  by  the 
amount  of  the  joint  fund,  but  by  the  absolute  necessities  of 
the  case.  When  sales  can  no  longer  be  made,  and  solvency 
depends  entirely  upon  the  ability  to  borrow,  the  risk  of  loss 
is  increased  at  the  same  time  that  the  banks  are  alarmed  at 
the  prospect  of  possibly  becoming  bankrupt  themselves,  and 
rates  are  made  according  to  the  risk.  Now  if  all  values  de- 
pend entirely  upon  the  quantity  of  labor  expended  on  them ; 
if  gold  and  silver  coin  are  commodities  in  the  ordinary  sense 
of  the  term  ;  if  banks  put  their  credit  —  in  other  but  equiv- 
alent words,  their  confidence  —  in  circulation  instead  of  put- 
ting into  circulation,  upon  their  own  credit,  the  money  of 
their  depositors  in  excess  of  the  circulation  those  depositors 
give  the  money  themselves,  thus  enabling  the  latter  to  in- 
crease to  that  extent  production  on  credit  in  excess  of  pro- 
duction in  other  quarters  ;  if  it  be  true  that  there  can,  by  the 
aid  of  bank  loans,  be  no  temporary  excess  of  the  relative  sls 
compared  with  the  absolute  necessaries  of  life,  and  with  pop- 
ulation, which  doctrines  I  have  attempted  to  refute  in  the 
foregoing  pages,  in  order  to  put  the  science  of  production 
and  exchange  on  *the  basis  of  truth  and  fact,  then  the  law 
governing  the  rate  of  bank  interest,  and  by  consequence  in- 
terest of  all  money  loaned  to  producers  of  relative  necessa- 
ries, ought  not  to  be,  and  cannot  be,  as  I  have  stated  it. 
But  every  banker  who  has  observed  knows  well  that  interest 
fluctuates  precisely  as  I  have  stated ;  and  many  bankers 


260 


POLITICAL  ECONOMY. 


know  it  to  their  cost.  It.is  not  alone  the  quantity  of  money 
in  the  market  ready  to  be  loaned,  and  the  demand  for  it, 
that  determine  rates  of  interest  as  primary,  for  they  are 
only  secondary  causes.  The  phrase,  quantity  of  money,  has 
in  science,  that  is  to  say  in  truth,  no  meaning  whatever 
by  itself  alone,  as  referring  to  an  active  original  cause  of 
loans.  Wealth  is  not  absolute  but  relative,  and  as  a  national 
whole  is  more  a  condition  than  an  entity  by  itself ;  it  is  in 
its  highest  state  when  all  parts  of  the  field  of  production  are 
not  only  worked  with  due  energy  but  are  also  in  harmony ; 
and  no  one  is  made  bankrupt  through  inability  to  exchange 
the  surplus  of  what  he  has  produced  for  want  of  a  market. 
The  highest  condition  of  wealth  possible  is  the  utmost  pos- 
sible advance  of  production  in  every  direction  with  the  least 
possible  waste,  subject  to  the  foregoing  law. 

In  order  to  carry  on  the  production  and  exchange  of  civil- 
ization^ however,  there  must  first  be  inequalities  in  the  dis- 
tribution of  capital  and  its  fruits.  While  civilization  could 
not  exist  without  this  inequality,  and  without  more  or  less 
of  what  is  called  luxury,  there  are,  however,  tendencies  to 
excess,  arising  from  unsteadiness  of  production,  profits,  in- 
terest, and  prices.  Excess  rules  when  prices  are  in  the  as- 
cending, abstinence  when  they  are  in  the  descending  scale. 
And  what  is  this  abstinence  ?  It  is  for  the  most  part  de- 
creasing consumption  of  the  relative  necessaries  of  civiliza- 
tion, especially  those  called  luxuries,  whose  production  has 
been  in  excess  of  absolute  necessaries.  Steadiness  of  pro- 
duction, of  profits,  interest,  and  prices,  can  alone  produce  a 
reasonable  average  out  of  all  this  excess  and  defect. 

Interest,  then,  is  the  share  in  the  profits  of  production, 
paid  sometimes  in  advance  by  way  of  discount,  not  only  to 
the  moneyed  capitalist  who  lends  money  upon  bills  and  notes, 
on  the  security  of  quick  capital,  and  draws  his  check  upon 
a  bank  for  the  money,  but  also  the  share  in  those  profits 
paid  to  the  banker,  who,  by  giving  an  additional  circulation 
to  the  same  money,  enables  so  much  additional  production  to 
take  place  over  and  above  what  could  take  place  if  he 
did  not  exist,  and  over  and  above  the  consumption  which 


INTEREST,  RENT,  AND  TAXES. 


261 


has  actually  taken  place.  To  enable  the  producer  to  pay 
this  additional  interest,  or  rather  to  put  him  in  the  way  in 
which  he  expects  to  pay  it,  he  must  engage  in  additional 
production.  But  is  the  profit  fund  arising,  or  supposed  to 
have  arisen,  from  this  additional  production  alone  devoted 
to  the  payment  of  the  banker's  interest  ?  Surely  not. 
There  is  but  one  fund,  and  all  producers  and  all  lenders 
share  the  gain  or  loss.  Gain  or  loss  is  a  hazard  or  lottery, 
to  which  all  producers  through  money  put  in  circulation  on 
bank  credit  are  subject,  and  all  lenders  are  thus  forced  to 
share  the  loss.  The  most  prudent  and  conservative  make 
the  most  gain,  the  least  prudent  the  most  loss  ;  but  all  gain 
or  lose,  according  to  the  amount  they  lend,  and  the  char- 
acter, capital,  and  good  luck  of  those  who  borrow.  If  no 
bank  loans  were  made,  it  is  certain  that  capitalists  who 
would  then  make  the  only  loans  possible,  in  order  to  enable 
producers  to  produce  on  credit,  would  run  but  little  risk  of 
capital,  and  would  obtain  steady  rates  of  interest,  because 
production  would  be  steady,  and  the  profit  fund  steady.  In 
order,  therefore,  to  attain  to  the  highest  possible  rate  of 
steadiness  in  rates  of  interest  on  bank  and  other  loans,  some 
definite  point  for  all  banks  must  be  fixed  beyond  which  loans 
cannot  go,  and  at  which,  therefore,  the  bank  circulation  of 
money  upon  bank  credit,  and  by  consequence  further  pro- 
duction upon  credit,  must  stop.  That  point  has  been  desig- 
nated by  the  clearest  demonstration  in  the  foregoing  pages, 
in  various  forms,  and  to  furnish  such  demonstration  has 
been  one  of  the  objects  of  this  work.  With  such  a  point 
fixed  and  never  transcended,  the  difficulties  before  men- 
tioned will  to  a  large  extent  vanish.  Banks  of  issue  exclu- 
sively, whose  notes  are  always  and  readily  convertible^  do  not 
cause  circulation  to  take  place  upon  credit  to  any  consider- 
able extent",  and  hence  their  loans  do  not  materially  increase 
production  upon  credit,  as  do  the  loans  of  discount  and  de- 
posit banks  when  loans  are  in  the  ascending  scale.  This 
is  matter  of  the  clearest  demonstration,  although  universal 
opinion  seems  to  be  to  the  contrary.  The  reason  is,  that 
their  paper  attains  and  maintains  an  average  volume,  which 


262 


POLITICAL  ECONOMY. 


cannot  be  materially  increased  or  diminished,  taking  the 
place  of  the  same  amount  of  coin,  and  virtually  increasing 
the  total  of  metal  in  use  as  money,  by  its  volume ;  and  be- 
cause, over  and  above  all  other  considerations,  notes  issued 
by  a  bank  in  the  absence  of  all  deposit  and  discount  banking 
can  rarely  be  used  in  payment  for  labor  and  raw  material 
but  once  before  they  or  an  equal  amount  of  metal  are  re- 
turned to  the  issuing  bank  in  payment  of  the  loan,  or  the 
bank  is  called  upon  to  redeem  them  in  coin,  not  out  of  a 
dead  reserve  but  out  of  the  commercial  world's  stock  at  large, 
thus  balancing  the  expansion  of  circulation  by  a  speedy 
contraction.  I  say  out  of  the  commercial  world's  stock,  be- 
cause, as  shown  in  a  previous  chapter,  metal  circulates  with 
the  notes,  and  is  not  retired  by  the  notes  ;  metallic  circula- 
tion outside  of  banks  replenishes  bank  reserves,  and  they 
replenish  circulation.  Any  one  or  more  banks  of  issue  in 
the  absence  of  all  deposit  and  discount  banking  may  con- 
tinue to  loan  to  producers  in  excess,  however,  after  they  are 
thus  called  upon  to  redeem,  but  their  action  is  independent 
of  other  banks,  and  they  will  soon  exhaust  their  capital,  as 
in  the  case  of  the  Bank  of  Ayr  in  Scotland.  Few  banks  of 
issue  purely  are  now  to  be  found,  but  their  working,  before 
the  modern  system  of  deposit  and  discount  was  developed, 
may  be  ascertained  by  reading  Smith's  "  Wealth  of  Na- 
tions," especially  pp.  225-253.  There  is  a  limitation  short 
of  a  banking  crisis,  to  the  ability  of  a  bank  of  issue,  whose 
notes  are  pei^ectly  and  conveniently  convertible,  to  sustain 
production  of  any  kind  upon  credit,  because  the  amount  of 
its  notes  which  can  be  kept  in  circulation  depends  upon  the 
amount  of  coin  circulating  in  the  country  of  issue  ;  and  the 
latter  amount  depends  on  the  amount  of  coin  circulating  in 
the  commercial  world.  Rates  of  interest,  therefore,  are  com- 
paratively steady  with  banks  of  issue  because  production  is 
comparatively  stead}'' :  the  margin  of  profits  is  steady,  and 
therefore  interest,  payable  out  of  that  margin,  must  be 
steady.  Steadiness  of  production,  being  the  cause  of  steadi- 
ness of  profits  as  well  as  wages,  is  then  the  chief  cause  of 
steadiness  of  rates  of  interest  on  loans.    Bank  loans  in  the 


INTEREST,  RENT,  AND  TAXES. 


263 


United  States  are  made  largely  at  certain  seasons  in  agri- 
cultural districts,  out  of  village,  town,  and  city  banks,  to 
market  crops.  The  demand  for  loans  for  this  purpose,  be- 
ing sometimes  great,  because  limited  to  comparatively  short 
periods,  carries  up  the  rate  of  interest  above  average,  but  on 
the  whole,  and  independently  of  this  special  demand,  inters 
est  on  such  loans  is  more  steady  than  on  others.  Neverthe- 
less, the  unsteadiness  of  production  of  the  relative  necessa- 
ries of  life,  and  the  consequent  rise  and  fall  in  rates  of 
interest  on  loans  to  the  producers  of  those  necessaries,  un- 
avoidably carries  more  or  less  of  its  influence  to  loans  to 
other  producers  ;  and  such  all  experience  shows  to  be  the 
fact.  It  is  because  after  taking  into  account  the  relative 
necessaries  on  hand  (this  embraces  luxuries,  so  called),  im- 
ported as  well  as  produced  at  home,  there  is  an  excess,  rela- 
tive to  and  compared  with  absolute  necessaries,  that  rates  of 
interest  rise.  The  more  these  necessaries  increase  the  more 
population  increases,  and  the  smaller  the  surplus  of  the  rela- 
tive over  the  absolute.  The  relative  increase  of  the  latter  is 
attended  with  the  relative  decrease  of  the  former,  dollar  for 
dollar,  because  actual  exchanges  take  place  through  the 
medium  of  the  money  employed.  It  is  the  use  of  money 
loaned  to  pay  for  labor  and  material,  the  products  of  which 
cannot  be  thus  exchanged,  which  produces  crises  and  causes 
variations  in  the  rate  of  interest.  When  a  surplus  of  rela- 
tive necessaries  exists,  if  they  were  exchanged  for  each  other 
indefinitely  this  would  take  place  without  producing  any  re- 
sult, because  it  would  not  feed  the  producers,  and  money 
could  not  be  obtained  to  aid  the  exchange  between  the  ab- 
solute and  relative,  because  there  is  no  corresponding  sur- 
plus of  the  absolute.  The  exchange  is  as  impossible  as  to 
make  a  superstructure  larger  than  the  foundation. 

On  the  whole,  then,  the  greater  the  advance  of  the  pro- 
duction of  the  absolute  over  the  relative,  the  steadier  the  rate 
of  interest.  Increase  of  population  alone,  if  we  assume  such 
an  increase,  sufficient  in  numbers  to  consume,  and  also  ac- 
cording to  the  present  state  of  civilization  actually  requiring 
that  surplus  to  consume,  would  not  dispose  of,  because  they 


264 


POLITICAL  ECONOMY. 


would  have  nothing  to  exchange  for  it ;  nothing  but  an  equal 
surpkis  of  absolute  necessaries  would  accomplish,  because  it 
could  alone  furnish  the  means  of  exchange.  Such  a  sup- 
posed surplus,  however,  is  practically  impossible,  because  pop- 
ulation would  be  abreast  of  it,  and  then  such  surplus  would 
vanish. 

Taxes,  being  first  payable  out  of  the  same  fund  with  profits 
and  interest,  diminish  the  net  rate  of  the  latter  by  reducing 
the  fund.  If  the  tax  rate  is  very  high,  there  is  so  much  less 
of  the  margin  of  profits  left,  and  so  much  less  to  divide  be- 
tween borrowers  and  lenders,  who  are  the  joint  producers. 
As  the  volume  of  production  expands,  the  margin  of  profits 
seems  to  expand ;  interest,  wages,  prices,  and  the  expenses 
of  government  rise.  Those  employed  by  the  state  require 
higher  wages  and  salaries,  but  this  is  a  small  affair  compared 
with  the  increasing  expenditures  of  borrowed  money  in  the 
United  States  by  states,  cities,  towns,  and  counties.  The 
resulting  loss  to  the  fund  out  of  which  producers  draw  their 
income  in  the  shape  of  profits  and  interest  is  enormous,  and 
tells  directly,  or  with  equal  effect  indirectly,  upon  the  rate. 
If  taxes  take  two  fifths  of  the  fund,  or  say  two  per  cent,  of 
capital,  there  is  but  eight  per  cent,  left  for  wages,  profits,  and 
interest.  There  is  no  remedy  but  gradual  payment  of  the 
principal,  for  bankruptcy  will  not  wipe  out  municipal  debt. 

Were  production  of  absolute  in  excess  of  relative  necessaries 
possible,  and  were  bank  loans  expended  on  the  production  of 
absolute  instead  of  being  as  they  are  expended  on  the  pro- 
duction of  relative  necessaries,  and  should  a  relative  over- 
stock of  the  absolute  thus  occur,  then  a  crisis  would  result 
from  that  overproduction,  as  it  now  results  from  overproduc- 
tion on  credit  of  the  other  sort.  The  remedy  would  be  of 
the  same  kind,  and  that  would  be  to  send  one  half  the  hands 
required  to  produce  the  overstock  to  the  manufacture  of  rela- 
tive necessaries  :  the  increased  production  in  that  line  would 
then  balance  the  remaining  excess  in  the  other.  A  balance 
could  not  otherwise  be  brought  about  between  the  two  :  no 
amount  of  exchanging  could  bring  it  about,  by  exchanges 
of  one  sort  only,  and  the  profit  fund,  and  therefore  interest, 


INTEREST,  RENT,  AND  TAXES 


265 


would  vary,  as  in  the  other  case  we  find  to  be  the  fact.  In 
hke  manner,  the  expenses  of  government  and  municipal  ex- 
penditures of  all  kinds  would  increase,  as  for  the  last  twelve 
years  they  have  enormously  increased  in  the  United  States. 
Increased  and  increasing  taxation  arises  chiefly  from  the 
apparent  increase  of  prosperity  through  a  rising  scale  of 
prices,  brought  on  by  expanding  production  ;  and  it  is  en- 
hanced by  inconvertibility  and  increase  of  bank  or  govern- 
ment paper. 

MODES  OF  TAXATION. 

As  a  matter  of  absolute  and  exact  justice  and  equality,  to 
secure  as  far  as  possible  the  equal  distribution  of  the  burdens 
of  taxation,  the  taxation  of  income  is  the  only  possible  mode 
in  the  abstract  by  which  it  can  be  effected.  But  in  point 
of  fact,  equality,  or  even  a  fair  approximation  to  equality,  is 
impossible.  Taxation  of  capital  is  more  or  less  fair  as  it 
more  or  less,  by  the  manner  of  assessing,  brings  about  indi- 
rectly a  fair  taxation  of  income.  If  all  owners  of  land  were 
authorized  to  deduct  their  net  indebtedness,  including  mort- 
gages, from  all  the  property  they  own,  mortgages,  and  by 
parity  of  reason  other  debts,  due  by  the  owners  of  the  land 
ought  not  to  be  deducted  in  the  assessments  of  the  owners  of 
those  mortgages  and  debts,  but  charged  as  an  item  for  taxa- 
tion, where  capital  is  taxed  instead  of  income.  If  neither 
mortgages  nor  debts  of  any  kind  are  deducted  from  land 
assessments  under  any  circumstances,  and  the  owner  of  the 
mortgage  or  other  debt  is  not  allowed  to  deduct  it,  there  is 
double  taxation  of  the  income  of  the  land  ;  first,  by  assessing 
total  capital  in  the  land,  and  thereb}''  total  income  to  the 
owner  ;  and  secondly,  by  assessing  the  total  capital,  of  which 
the  mortgage  is  evidence,  which  capital  is  no  other  than  so 
many  dollars  and  cents  to  be  paid  out  of  the  income  of  the 
land,  and,  failing  that,  the  land  itself.  If  creditor  and  debtor 
reside  in  the  same  state,  therefore,  the  same  sovereignty 
taxes  the  same  income  twice,  to  the  extent  of  interest  on  the 
debt.  The  land-owner  pays  tax,  moreover,  on  an  income  he 
does  not  receive.    Nor  can  he  be  reimbursed  by  borrowing 


266 


POLITICAL  ECONOMY. 


at  lower  rates  in  consequence,  because  the  lender  pays  taxes 
on  the  same  income.  The  loss  through  this  unequal  and  un- 
just double  taxation  must,  therefore,  be  mutually  borne,  or 
thrown,  as  it  sometimes  is,  for  the  most  part  on  the  bor- 
rower. But  suppose  the  mortgage  .or  other  debt  to  be  owned 
in  a  state  other  than  that  in  which  the  land  lies.  Double 
taxation  results  also  in  this  case ;  but  how  is  the  state  where 
the  owner  of  the  debt  resides  to  tax  all  the  income  of  its  citi- 
zens, either  directly  or,  by  taxing  capital,  indirectly,  unless  it 
taxes  the  principal  or  the  interest  of  such  debts  ?  The  true 
policy  of  the  state  of  the  debtor  is  to  waive  thus  far  its  right 
of  taxation,  and  let  the  creditor  pay  the  tax,  because  it  will 
be  made  up  to  him  in  a  higher  rate  of  interest  than  he  could 
obtain  should  the  debtor  pay  it.  But  the  question  is  a  prac- 
tical one.  Whose  fault,  upon  the  principle  demonstrated,  — 
that  taxes,  interest,  and  other  profits  are  paid  out  of  the  same 
fund,  —  is  it  chiefly  that  double  taxation  exists  in  the  case 
supposed  ?  Surely  in  the  state  where  the  land  is  situated. 
The  exchanges  between  the  East  and  the  West,  the  "  sea- 
board "  and  the  interior,  are  made  precisely  upon  the  same 
principle  as  between  the  United  States  and  foreign  countries. 
Checks  and  drafts  are  like  bills  of  exchange,  —  none  of  them 
pay  debts,  although  it  is  commonly  asserted  that  they  do. 
They  are  only  the  instruments  by  which  money  is  directed  to 
be  paid  by  the  shippers  of  merchandise  to  the  buyers  of  re- 
turn merchandise,  and  the  money  is  paid  over  to  the  latter, 
who  invest  it  in  merchandise  to  be  shipped  in  the  opposite 
direction,  and  thus  indirectly  exchanged,  not  by  means  of 
checks,  drafts,  and  bills  alone,  but  by  money  paid  out  through 
the  instrumentality  of  these.  If  these  are  paid  out  directly 
for  the  return  merchandise  by  the  buyers  to  the  sellers  of  that 
merchandise,  the  latter  collect  them  in  cash,  or  have  them 
discounted  in  bank  or  elsewhere,  and  receive  the  cash.  To 
assert  that  bills  of  exchange  are  anything  more  than  mere 
instruments,  that  they  take  the  place  of  money,  is  the 
result  of  the  want  of  a  rigorous  analysis  of  the  real  facts  in 
the  case,  —  a  fault  which  has  hitherto  prevented  the  estab- 
lishment of  any  true  science  of  exchange.    The  money  loaned 


INTEREST,  RENT,  AND  TAXES. 


267 


by  the  East  to  the  West,  thus  secured  by  mortgage,  has  car- 
ried westward  money,  or  checks  and  drafts,  to  draw  money 
on  deposit,  which  has  thus  gone  to  increase  western  balances, 
which  being  transferred  by  check  to  the  sellers  of  merchan- 
dise at  the  East,  have  carried  westward  to  the  borrowing 
states  merchandise  to  that  amount.  The  quick  capital  of  the 
borrowing  states  has  been,  by  loans,  increased  to  that 
amount.  This  increase  of  capital,  which  we  are  bound  to 
suppose  continues  more  or  less  productive,  has  added  so 
much  to  capital  for  assessment.  Therefore,  by  allowing  the 
land-owner  to  deduct  the  mortgage  debt,  the  borrowing  state 
loses  nothing,  because  the  amount  is  made  up  to  it  by  the 
additional  capital  furnished  through  the  loan.  If  both  states 
tax,  however,  without  any  regard  to  the  loan  or  its  conse- 
quences, it  may  be  said  that  the  creditor's  state  has  lost  cap- 
ital for  taxation  unless  it  continues  to  tax  ;  and  that  the 
income  is  receivable  there  wherever  the  money  may  be 
loaned ;  that,  in  consequence  of  its  taxation,  the  lender  will 
partly  reimburse  himself  by  a  higher  rate  of  interest,  and 
thus,  instead  of  losing  to  the  extent  of  the  tax,  he  and  the 
borrower  will  divide  the  loss  caused  by  this  double  taxation 
between  them.  The  whole  wrong  would  be  righted,  and 
only  could  be  righted,  by  throwing  all  taxes  upon  net  in- 
come—  were  this  possible — unless,  as  a  matter  of  policy,  a 
part  were  thrown  upon  the  consumption  of  luxuries  and  stim- 
ulants by  way  of  excise.  But  do  luxuries  and  stimulants  pay 
all  the  taxes  actually  assessed  against  them  ?  Directly,  yes  ; 
indirectly,  no.  The  business  of  the  world  is  production  and 
exchange.  If  luxuries  and  stimulants,  or  any  sort  of  com- 
modities, pay  a  higher  tax  than  other  things,  the  ability  of 
the  consumers  to  consume,  and  therefore  to  exchange,  is  'to 
that  extent  diminished,  and  the  fund  out  of  which  taxes  are 
paid  to  that  extent  exhausted ;  hence  this  field  is  limited. 
Under  no  circumstances,  however,  ought  double  taxation  to 
occur,  and  yet  it  will  occur,  and  continue  to  occur,  until  ar- 
rested, either  by  assessing  capital  in  such  a  manner  as  to 
make  taxes  as  nearly  as  possible  proportioned  to  income,  by 
taxing  income  alone,  or,  in  addition  to  this,  taxing  luxuries, 


268 


POLITICAL  ECONOMY. 


and  stimulants  which  may  be  regarded  as  luxuries,  in  such 
a  manner  as  to  throw  a  considerable  part  of  the  burdens  of 
taxation  upon  the  latter.  The  science  of  taxation  is  in  a 
crude  state,  but  no  more  so  than  that  of  production  and  ex- 
change. Until  the  first  lesson  —  that  income  pays  all  taxes 
—  is  learned,  there  will  be  both  state  and  inter-state  double 
taxation  ;  and  until  the  second  lesson  —  that  money  is  a  con- 
ventional commodity,  and  at  the  same  time  conventional 
capital,  whose  value  lies  not  in  itself  as  productive  capital, 
but  only  in  the  as  yet  undetermined,  because  not  yet  desig- 
nated, capital  or  commodities  its  owner  will  in  the  future  ex- 
change it  for,  and  that  to  tax  it  is,  therefore,  to  tax  non-pro- 
ductive capital  —  is  learned,  there  will  be  double  taxation : 
first,  by  the  states,  and  second,  by  the  states  and  the  United 
States.  Taxation  as  a  whole,  on  whatever  production  and, 
therefore,  income,  it  falls,  tells  upon  all  production  and  all 
income.  The  producer  who  is  overtaxed  one  hundred  dol- 
lars has  one  hundred  dollars  less  to  exchange  in  products  for 
the  products  of  other  producers.  The  tax  in  the  shape  of 
tariff  paid  by  the  consumer  of  an  imported  article  is  a  part 
of  the  gross  income  of  government,  which,  had  it  not  been 
collected  from  the  producing  consumer  who  bought  it,  would 
have  been  collected  from  some  other  producer  and  paid  in 
like  manner  to  those  who  draw  income  and  support  from  the 
government ;  the  fund  is  equally  drawn  upon  and  equally 
reduced  in  either  case.  A  tariff,  as  a  source  of  protection, 
benefits  the  producer  of  relative  necessaries  in  the  United 
States,  as  well  as  elsewhere,  in  the  exact  proportion  that  he 
is  enabled  to  produce  and  sell  what  he  produces  at  a  profit. 
If  the  cost  of  producing  rises  in  proportion  to  the  tariff  im- 
posed, and  falls  in  proportion  when  the  tariff  is  taken  off, 
there  results  little  or  no  protection  ;  sometimes  the  foreign 
and  sometimes  the  domestic  article  will  be  cheapest.  But  it 
is  reasoning  from  false  premises  to  assert  that  the  tariff  paid 
by  the  consumer  necessarily  raises  the  cost  of  production  in 
proportion.  Had  the  tax  not  been  paid  in  this  form  it  must 
have  been  paid  in  some  other  ;  there  is  no  national  loss  in 
the  case  whatever,  except  to  the  profit  fund,  and  that  is  un- 


INTEREST,  RENT,  AND  TAXES. 


269 


avoidable.  The  loss  to  the  producer,  who  is  protected,  con- 
sists in  the  fact,  that  to  the  extent  of  the  consumption  of  the 
foreign,  in  place  of  which  he  could  have  sold  the  consumer  a 
domestic  article,  he  has  lost  a  market,  for  want  of  that  pro- 
tection which  the  tariff  was  intended  to  give  him.  Only  so 
far  as  he  makes  sales  under  the  tariff,  which  he  could  not 
have  made  independently  of  the  tariff,  is  he  "protected." 
Absolute  protection,  therefore,  consists  in  absolute  exclusion, 
and  partial  protection  in  partial  exclusion  of  the  protected 
products  actually  consumed.  Where  there  is  only  a  partial 
exclusion  of  the  protected  article,  the  tariff  paid  on  the 
foreign  article  by  the  producing  consumer,  goes  directly  to 
the  government  as  a  part  of  its  revenues,  which,  had  it  not 
been  paid  in  this  quarter  by  producing  consumers,  must  have 
been  paid  by  them  in  some  other  quarter ;  the  advance  in 
price  on  the  protected  domestic  article  actually  consumed  is 
a  bounty  paid  directly  to  the  producer  of  it,  or  indirectly  to 
him  through  the  merchant,  and  also  an  additional  bounty 
paid  to  the  merchant  as  a  producer  of  additional  value,  in 
the  shape  of  increase  of  profit  upon  increased  cost  through 
the  bounty.  The  total  of  this  increase  of  cost  to  the  produc- 
ing consumer  diminishes  his  power  of  consuming,  as  the  tar- 
iff on  the  foreign  article,  paid  by  the  other  producing  con- 
sumer, diminishes  his  power  of  consuming  in  like  manner. 
Hence  the  true  object  of  all  protection  must  necessarily  be 
the  same :  to  enable  the  producer  of  the  protected  article 
ultimately  to  drive  the  foreign  article  out  of  the  market,  by 
producing  at  such  prices  as  will  exclude  it.  Now,  to  compel 
one  producing  consumer,  in  consequence  of  rising  prices,  to 
pay  a  bounty  to  another  producing  consumer,  is  to  take  indi- 
rectly the  property  of  A.  by  legislative  decree  and  give  it  to 
B.,  without  giving  A.  a  day  in  court  to  object  and  defend. 
It  can  be  excused  only  on  the  ground  that  the  greatest  good 
of  the  whole  is  paramount  to  that  of  a  part ;  and  that  the  net 
national  product  will,  on  the  whole,  in  the  end  be  increased 
in  consequence ;  that  ultimately  the  protected  article  will, 
through  protection,  be  afforded  cheaper  than  the  foreign 
article  could  be  free  ;  and  that  in  the  mean  time  there  is 


270 


POLITICAL  ECONOMY. 


no  other  quarter  in  the  great  field  of  production  to  which  the 
capital  thus  invited  to  produce  the  protected  article  can 
apply  itself  as  advantageously  for  the  whole  country.  As- 
suming all  this  to  be  true,  it  is  the  duty  of  government,  and 
it  is  to  the  interest  of  all  producers,  to  enable  the  protected 
producer  to  produce  as  cheaply  as  possible,  and  ultimately 
undersell  the  foreign  producer,  even  without  the  aid  of  a 
tariff.    To  do  this  he  must  have  the  benefit  of  steady  prices. 

To  all  producers  on  credit,  steady  rates  of  interest  are 
also  requisite,  and  these  will  follow  steady  prices.  The 
money  price  of  commodities  and  labor  settles  the  fate  for 
good  or  ill  of  the  average  producer  on  credit  of  relative 
necessaries.  It  is  loosely  said  by  many  writers,  that  all 
foreign  trade  and  most  domestic  trade  is  barter.  This  is 
utterly  false ;  and  with  utter  falsehood  taken  for  truth  it  is 
impossible  to  have  the  slightest  conception  of  the  actual  cost 
of  production  on  credit,  because  it  has  a  debt  to  pay  for  all 
it  produces.  Borrowed  money  pays  for  the  larger  part  of  all 
production  of  the  relative  necessaries,  and  money  not  bor- 
rowed pays  for  the  remainder.  It  is  utterly  impossible  for 
them  to  be  bartered,  therefore,  instead  of  sold,  for  if  bar- 
tered how  is  the  producer  and  seller  to  reimburse  himself 
for  the  money  expended  ?  If  he  produces  for  money  he 
must  sell  for  money.  But  are  not  relative  necessaries 
shipped  West,  absolute  necessaries  East,  and  both,  in  the 
shape  of  wheat,  Indian  corn,  provisions,  cotton,  etc.,  shipped 
abroad  and  exchanged  for  each  other  without  the  use  of 
money,  by  the  instrumentality  of  checks,  drafts,  and  bills 
alone?  Nothing  of  the  kind,  as  before  shown.  Money 
alone  pays  for  labor  and  materials,  and  money  alone  pays 
checks,  drafts,  and  bills.  Goods  shipped  abroad  to  sell  do 
not  need  money  to  accompany  them  in  order  to  export  and 
sell  them  abroad  ;  nor  do  the  goods  shipped  thence  in  ex- 
change require  money  to  accompany  them  to  this  side. 
The  money  is  paid  where  the  goods  are  sent,  sooner  or  later. 
If  gold  and  silver  were  in  use  only,  the  process  would  be  the 
same ;  and  even  if  the  checks,  drafts,  and  bills  of  solvent 
merchants  drawn  in  suitable  sums,  were  in  use  altogether, 


INTEREST,  RENT,  AND  TAXES. 


271 


without  gold  or  silver,  the  former  would  be  money  quite  as 
much  as  the  latter  is  or  can  be,  and  would  take  the  place  of 
it  for  all  purposes  of  exchange,  become  the  unit  of  value, 
purchase,  and  payment,  and  a  substitute  for  one  commodity 
or  merchandise,  in  all  exchanges.  Barter  is  out  of  the  ques- 
tion in  civilization.  To  make  "  protection  "  avail,  then, 
steady  prices  are  of  more  importance  than  bounty,  to  insure 
against  loss,  and  regulation  of  loans  of  more  importance 
than  command  of  markets  in  order  to  secure  against  over- 
stock. The  only  regulation  of  this  kind  possible,  as  I  have 
shown  in  other  chapters,  is  a  regulation  of  those  loans 
which  are  made  to  the  producers  on  credit  of  the  relative 
necessaries  of  life.  This  regulation  must  be  effected  through 
deposit  and  discount,  otherwise  called  commercial  banks. 
Tariffs,  taxes,  and  continual  improvements  of  machinery 
have  much  to  do  with  the  result  as  post-auxiliary  causes  ; 
the  chief  immediate  cause  of  loss  lies  in  possible,  converted 
into  actual  production  of  relative  overstock,  whereby  the  ex- 
changes are  blocked ;  followed  by  high  rates  of  interest,  and 
improvident  loans  of  all  sorts  ;  high  rents  and  high  taxe§, 
assessed  largely  upon  imaginary  values.  These  results  do 
not  depend  directly  upon  the  exchanges  made  through  im- 
port and  export.  Exchanges  of  this  kind,  instead  of  produc- 
ing a  crisis,  are  a  part  of  the  means  of  avoiding  or  curing  it. 
Could  the  imports  have  been,  and  had  they  been,  all  pro- 
duced at  home  as  well  as  the  exports,  the  surplus  of  the  lat- 
ter requiring  to  be  exchanged  would  have  been  exchanged 
for  the  same  articles  produced  at  home,  and  the  overstock 
would  have  been  substantially  the  same  as  it  has  been.  In- 
ternational trade  is  essential  to  civilization,  and  the  world 
will  become  more  and  more  civilized  as  the  whole  commer- 
cial world  comes  to  be  regarded  as  one  country.  The  ques- 
tion of  all  questions  for  every  country,  and  particularly  for 
the  United  States,  is  to  distribute  its  productive  population 
in  such  parts  of  the  field,  that  after  all  home  consumption 
prior  to  all  exchange,  after  all  national  exchanges  follow- 
ing that  consumption,  and  after  all  international,  following 
national  exchanges,  have  taken  place,  the  smallest  possible 


272 


POLITICAL  ECONOMY. 


relative  surplus  will  be  left  in  any  one  quarter,  over  and 
above  what  may  be  found  in  any  other  quarter.  Harmony 
of  production,  steadiness  of  .prices,  steadiness  of  interest, 
and  (exclusive  of  war)  steadiness  of  taxation,  the  utmost 
equality  possible  in  the  distribution  of  wealth,  the  utmost 
possible  production  as  a  whole  and  upon  the  average,  and 
the  utmost  possible  contentment  and  satisfaction,  wiy  be  the 
result  of  following  this  course. 

But  all  this  complex  result  follows  only  from  the  proper 
distribution  of  productive  population.  The  science  of  Pro- 
duction and  Exchange  is  utterly  useless  in  its  present  state 
of  development.  There  is  almost  entire  ignorance  of  the 
sources  of  evil,  and  still  more,  therefore,  of  a  remedy.  The 
science  is  unavailable  unless  practical  as  well  as  abstract. 
What  force,  every  reader  has  a  right  to  ask,  can  be  applied 
to  distribute  productive  population  so  as  to  produce  this 
result  ?  Is  there,  or  can  there  be,  such  a  force,  and  if  so,  is 
there  any  conceivable  method  of  applying  it  so  as  to  produce 
the  result  ?  To  a  considerable  extent  there  is,  undoubtedly, 
I  answer.  The  disease  lies  in  that  part  of  the  social  system 
where  lies  production  of  relative  necessaries,  extending  to 
exchange,  which  is  the  adjoining  and  only  remaining  part  of 
production.  If  it  were  possible  to  have  a  state  of  barter  and 
a  state  of  high  civilization  and  energetic  production  at  the 
same  time,  and  such  a  state  now  existed  to  the  absolute  ex- 
^  elusion  of  money  in  all  its  forms,  there  could  be  no  industrial 
crisis,  because  productive  population  would  of  necessity  be 
properly  distributed :  they  would  be  properly  distributed, 
because  the  producer  of  cloth  or  of  iron  could  never  ex- 
change a  yard  or  a  pound  of  his  product  for  wheat  or  pro- 
visions without  actual  delivery  at  the  time ;  and  thus  there 
could,  by  no  possibility,  be  a  greater  consumption  of  wheat 
and  provisions  by  the  producer  of  iron  or  cloth,  than  of  iron 
or  cloth  by  the  producer  of  wheat  and  provisions.  The  pro- 
ducer of  cloth  or  of  iron,  and  his  workmen,  could  only  be  fed 
while  and  as  far  as  he  found  a  market  of  actual  consumers 
who  could  and  would  pay  down  for  his  iron  or  cloth.  He 
might  borrow  wheat  and  provisions  to  be  obtained  upon  the 


INTEREST,  RENT,  AND  TAXES. 


273 


order  or  check  of  a  capitalist,  but  these  loans  could  never 
carry  production  on  credit  to  excess  ;  they  would  only  be  a 
healthy  stimulus  to  production,  as  already  shown,  and  could 
never  be  the  cause  of  a  crisis.  To  approach  as  nearly  as  pos- 
sible to  such  a  condition,  while  still  paying  all  labor,  and  car- 
rying on  all  exchanges  with  money,  is  the  objective  point  to 
be  sought.  This  attained,  human  science  can  do  no  more  : 
practical  skill,  caution,  and  prudence  must  accomplish  the 
rest.  This  objective  point  is  approached  as  nearly  as  it  can 
be  with  the  use  of  money,  in  France,  where  coined  metal, 
supplemented  with  a  small  amount  of  paper  over  and  above 
the  coin  in  reserve  to  redeem  it,  is  used.  The  objective 
point  is  thus  approached,  not  because  coined  metal  is  an 
ordinary  commodity,  and  therefore  an  exchange  of  it  for 
wheat,  cloth,  or  iron,  is  barter,  but  because  the  coin,  al- 
though not  governed  by  the  law  of  ordinary  commodities, 
yet  being  distributed  in  France  in  the  absence  of  banks,  only 
so  far  as,  for  the  most  part,  actual  exchanges  of  commodities 
for  consumption  take  place,  can  never,  by  being  paid  out  for 
labor,  largely  in  excess  of  those  exchanges,  cause  such  accu- 
mulations of  overstock  as  we  have  witnessed  in  England 
and  the  United  States.  In  the  United  States  a  large  amount 
of  the  deposits  in  savings  banks  consists  of  earnings  of  labor, 
received  for  working  raw  material  into  overstock  not  yet 
paid  for,  by  those  actual  exchanges  of  commodities  which 
would  exist  under  such  a  state  of  barter  as  I  have  described, 
which  do,  for  the  most  part,  take  place  in  France,  and  which 
ought  everywhere  to  take  place,  in  order  to  secure  harmony 
of  production.  Money  is  absolutely  necessary  to  effect  the 
exchanges  of  civilized  men,  whether  it  be  of  metal  or  paper, 
or  of  units  of  value,  purchase,  and  payment  founded  on 
bank  credit,  were  these,  as  in  point  of  fact  they  never  have 
been,  used :  the  whole  of  the  difficulty  and  the  danger  which 
lies  in  the  use  of  money  instead  of  barter,  consists  in  the 
fact  that  as  money  is  not  wanted  to  consume,  but  only  to 
exchange,  it  can,  through  deposit  and  discount  banking,  be 
paid  out  and  repaid  for  labor  and  raw  material  faster  than 
the  resulting  product  of  labor  and  raw  material  can,  through 
18 


274 


POLITICAL  ECONOMY. 


sales,  be  exchanged  for  other  products  of  labor  and  raw  ma- 
terial or  capital.  This  overplus  is  what  I  call  more  particu- 
larly production  on  credit,  because  the  producer  stands  debtor 
on  banker's  and  bill-broker's  books  to  the  extent  of  the  over- 
plus for  a  long  time  and  to  large  amounts.  It  is  equally 
production  on  credit  whether  gold  sovereigns  as  in  England, 
dollars  in  bank-notes  as  in  the  United  States,  or  even  dol- 
lars in  bank  credit,  were  those  in  use,  are  paid  out  for  the 
labor  and  raw  material.  There  is  no  barter,  nor  anything 
like  it,  in  the  case :  the  whole  difficulty  lies  in  the  fact  that 
the  exchanges  are,  on  the  contrary,  too  far  removed  from  the 
inexorable  conditions  of  barter.  Where  pig  iron  and  labor 
are  paid  for  out  of  a  bank  loan,  secured  by  bill  or  note  of  the 
borrower,  and  possibly  still  further  secured  by  the  first  bonds 
and  mortgage  of  a  railroad,  and  the  resulting  railroad  bars 
sold  to  builders,  on  their  note  or  bill  discounted  in  bank  with 
or  without  the  same  collateral  security  and  not  yet  paid,  two 
things  are  absolutely  certain  :  1st,  that  the  bars  have  been 
made  on  credit,  by  means  of  a  loan,  and  could  not  have  been 
made  without  a  loan ;  2d,  that  the  bars  laid  down  by  the 
builders  on  their  railroad,  and  now  wearing  out,  and  there- 
fore being  rapidly  consumed,  have  never  been  exchanged 
for  other  products  of  labor,  although  they  have  been  ex- 
changed for  money  borrowed  out  of  bank.  Whether  this 
money  were  in  gold,  or  bank-notes  actually  delivered  out  of 
bank,  or  whether  through  clearing  the  actual  deliveries  were 
saved,  is  a  puerile,  a  senseless  inquiry. 

The  important  fact  in  the  case  is,  that  the  borrowed 
money,  exchanged  for  the  iron,  has  given  rise  to  no  second 
exchange  of  the  iron  for  money  not  borrowed.  Until  the 
latter  exchange  takes  place,  there  will  be  no  exchange  of 
commodities.  Where  money  is  not  borrowed,  and  is  laid 
out  in  purchase  of  a  commodity,  the  exchange  of  commodi- 
ties is  completed:  where  it  is  expended  for  labor,  a  new 
commodity  takes  the  place  of  the  one  the  money  was  last 
exchanged  for,  in  order  to  consume  it :  where  money  in  bank 
is  borrowed  and  expended  for  labor,  and  the  product  will 
not  sell,  the  exchanges  of  commodities  are  so  far  blocked. 


INTEREST,  RENT,  AND  TAXES. 


275 


The  mischief  lies  not  in  the  fact  that  there  is  any  overstock 
whatever,  but  such  an  excess  of  overstock  through  excessive 
loans  as  to  bring  on  a  crisis.  Any  other  conclusion  would 
be  illogical.  It  would  be  equally  illogical  to  affirm  or  to  sup- 
pose that  the  deposits  in  savings  banks  are  one  of  the  primary 
causes  of  overstock :  they  are  a  post-auxiliary,  not  a  primary 
cause.  If  there  were  no  deposit  and  discount  banks  there 
might  still  be  savings  banks :  the  savings  and  therefore  the 
deposits  would  not  be  as  large  as  now,  because  a  part  of  the 
depositors  would  devote  their  savings,  in  the  shape  of  capi- 
tal, to  the  production  of  the  absolute  necessaries  of  life,  by 
investing  in  productive  land.  We  have  too  little  of  this 
production  for  all  the  laborers  in  Europe  and  the  United 
States  who  are  laboring  or  asking  for  labor  in  cities  and  large 
towns  and  villages.  But  cannot  foreign  markets  be  obtained 
for  the  overstock  in  the  future  without  the  necessity  of  such 
changes  in  the  field  of  labor  ?  Are  not  our  improved  machin- 
ery, cheaper  material,  and  cheaper  absolute  necessaries,  suffi- 
cient to  insure  us  such  markets  ?  Undoubtedly,  if  we  can 
only  keep  prices,  and,  therefore,  cost  of  production,  steady. 
We  must  bring  down  the  cost  of  absolute  necessaries  by 
greater  production,  and  by  enabling  many  of  those  who  are 
now  fed  to  feed  themselves.  We  shall  thus  remove  the  diffi- 
culty in  the  exchanges  by  taking  away  a  part  of  those  who 
are  producing  the  overstock,  and  setting  them  at  work  pro- 
ducing, where  there  can  be  no  overstock.  With  some  changes 
in  taxation  direct  and  indirect,  there  will  be  no  difficulty  in 
disposing  of  all  surplus  we  may  produce.  Steady  rates  of  in- 
terest, steady  rates  of  taxation,  and  steady  rents  will  follow, 
because  they  necessarily  follow  from  steadiness  of  production, 
while  steadiness  of  production  follows  from  steadiness  of 
prices,  and  the  latter  from  steadiness  of  loans.  The  difficulty 
with  writers  upon  this  science  of  Production  and  Exchange, 
usually  called  Political  Economy,  is,  that  they  have  not  gone 
back  to  primary  causes :  they  have  called  secondary,  primary 
causes,  and  have  been  thus  led  to  form  imperfect  theories, 
instead  of  establishing  a  science.  But  the  subject  is  very 
complex,  and  therefore  these  mistakes  are  not  to  be  won- 


276 


POLITICAL  ECONOMY. 


dered  at.  In  all  the  theories  there  is  undoubtedly  more  or 
less  truth,  and  the  grand  complex  truth  can,  though  imper- 
fectly, be  found  by  taking  all  the  theories,  eliminating  the  er- 
rors, and  combining  all  into  one.  Because  a  glut  or  over- 
stock of  relative  necessaries  had  been  known  to  exist,  it  was 
false  reasoning  to  assert  as  an  inference  that  there  could  be 
an  overstock  of  necessaries  of  all  kinds,  and  that  those  who 
were  able  ought,  therefore,  to  consume  as  much  as  possible 
in  order  to  support  industry.  On  the  other  hand,  M.  Say's 
argument,  that  there  can  be  no  overproduction  anywhere,  is, 
in  the  abstract,  a  correct  inference  from  his  premises,  that 
there  can  be  no  general  overproduction. 

The  premises  are  sound  and  the  inference  apparently  true. 
I  say  apparently,  for  if  production,  as  a  whole,  is  never  in 
excess,  how,  it  may  be  asked,  can  it  be  in  any  of  its  parts ;  and 
why  in  one  part  rather  than  another  ?  The  fault  in  the 
premises  lies  not  in  the  fact  that  they  are  not  true,  but  in 
the  fact  that  they  do  not  contain  the  whole  truth;  and  they 
do  not  contain  the  whole  truth  because  they  are  the  simple 
result  on  the  average  of  a  very  complex  cause.  That  cause 
is,  that  although  in  spite  of  Malthus'  theory,  which  contains 
a  great  deal  of  truth,  there  is  still  abundance  of  what  may 
be  easily  made  productive  land,  and  land  already  productive 
may  be  made  more  so  in  some  quarters,  yet  the  absolute 
necessaries  of  life  are  for  the  most  part  annually  consumed, 
and  consumption  may  therefore  be  said  to  follow  close  upon 
the  heels  of  production  ;  while  the  relative  necessaries,  with- 
out which  there  can  be  no  civilization,  can,  by  the  very  com- 
plex causes  heretofore  pointed  out,  be  produced  in  relative 
excess,  leaving  a  large  annual  surplus  which  cannot  be  ex- 
changed. All  this  leads  to  a  crisis  of  production,  and  so  to 
a  rectification  of  the  excess.  That  there  can  be  no  general 
overproduction  is  therefore  true,  but  it  is  true  only  as  the 
consequence  or  result  of  the  fact  that  the  absolute  neces- 
saries are  not  and  cannot  be  overproduced.  If  they  could  be 
and  were  overproduced  like  the  other  necessaries,  the  surplus 
of  the  one  would,  as  I  have  in  another  place  shown,  balance 
the  surplus  of  the  other. 


INTEREST,  RENT,  AND  TAXES. 


277 


Again,  bank  credit  is  said  to  circulate  as  an  original  sub- 
stitute for  money.  Here,  again,  we  have  an  effect  which 
becomes  a  secondary  cause,  taken  as  a  primary  cause,  whereas 
bank  credit  never  circulates  as  such.  What  circulates  all  the 
time  is  money,  through  deposit  and  redeposit,  and  the  addi- 
tional circulation  over  and  above  that  caused  by  depositors 
is  what  banks  have  to  sell,  in  consequence  of  the  credit  they 
have  with  their  depositors.  Bank  debt,  sometimes  called 
bank  credit,  results  from  this  additional  circulation.  All  this 
error  comes  from  want  of  rigorous  analysis,  and  many  more 
instances  of  false  reasoning  could  be  given.  The  science  of 
Production  and  Exchange  being  thus  imperfect,  that  of  In- 
terest, Rent  and  Taxes,  which  are  branches  of  it,  cannot  well 
be  other  than  imperfect.  In  the  course  of  this  work  I  have,  in 
the  demonstrations  offered  in  different  chapters,  shown  how 
the  several  propositions  proved  result  from  more  general 
propositions  still,  before  established.  The  science  of  produc- 
tion and  exchange  is,  while  eminently  practical,  also  emi- 
nently abstract,  if  we  trace  all  the  last  effects  back  to  their 
secondary  causes,  and  these  back  to  their  primary  causes,  the 
latter  of  which  are  compamtively  small  in  number,  because 
complexity  grows  with  development.  This  course  has  pro- 
duced the  appearance  of  repetition,  the  primary  causes  being 
over  and  over  again  pointed  out,  as  from  different  angles  of 
observation  the  various  complex  results  have  been  traced 
back  to  the  same  primary  causes.  The  leading  active  cause 
of  all  is  money  of  some  kind  as  a  universal  equivalent  for 
one  commodity  in  all  exchanges  ;  and  the  reason  why  metal- 
lic money,  if  left  to  its  natural  circulation,  gives  steadier 
prices  than  paper  money,  issued  by  banks  of  issue  without 
the  functions  of  deposit  and  discount,  and  why  banks  like 
the  English  banks  of  deposit  and  discount,  using  gold  for  the 
most  part,  give  a  less  steady  circulation,  even  of  gold,  than 
banks  of  issue  give  of  notes  and  gold,  is  the  most  important 
corollary  of  all.  It  is  a  popular  opinion,  embraced  by  some 
writers,  that  small  notes  raise  prices  more  than  larger  can. 
If  such  were  the  case  they  would  affect  interest,  rent,  and 
taxes ;  but  there  is  no  valid  foundation  for  such  an  opinion, 


278 


POLITICAL  ECONOMY. 


and  I  have  heretofore  shown  that  a  duly  proportioned  reserve 
is  the  one  thing  necessary :  the  size  of  the  reserve  and  not 
of  the  notes  is  essential.  There  is  another  opinion,  which 
most  writers  have  adopted,  that  the  trade  between  two  for- 
eign countries  is  substantially  barter.  Barter  cannot  possibly 
exist  unless  two  commodities  are  directly  exchanged,  the  one 
for  the  other.  There  may  be  some  delay  in  one  of  the  de- 
liveries, but  it  is  made  at  last.  The  actual  trade  between 
New  York  and  Liverpool  or  London  resembles  barter  only  so 
far  that  comparatively  small  amounts  of  money  require  to  be 
sent  either  way.  There  is  no  real  barter  in  the  case,  nor 
anything  like  barter,  except  that  as  barter  requires  two  com- 
modities to  be  exchanged  for  each  other,  so  the  trade  between 
any  of  the  points  referred  to,  and  indeed  all  real  trade  what- 
ever, is  a  series  of  exchanges  of  commodities  made  by  the  use 
of  money,  first  or  last,  and  two  exchanges  are  required  in- 
stead of  one  where  money  is  used.  If  there  were  really  no 
trade  but  barter,  there  could  be  no  commercial  crisis,  and  if 
the  first  exchange  of  a  commodity  for  money  were  always 
sure  to  give  rise  to  a  second  exchange  for  money  on  behalf 
of  actual  consumers,  there  could  be  no  such  crisis.  When 
manufacturer  A.  produces,  by  means  of  a  bank  loan,  ten 
thousand  yards  of  cloth,  and  sells  it  to  merchant  B.,  who 
buys  with  the  proceeds  of  a  bank  loan,  and  sells  afterward 
the  same  goods  to  merchant  D.,  who  pays  in  like  manner, 
D.'s  loan  pays  B.'s,  and  B.'s  pays  A.'s,  but  there  has  been 
no  barter.  The  misfortune  is,  that  such  sales  do  not  take 
the  place  of  barter.  There  are  three  exchanges  here,  and 
but  one  commodity  appears.  The  real  mischief  lies  not 
in  the  fact  that  some  such  sales  are  made,  but  in  such  an 
excess  of  them,  as  we  have  witnessed  in  the  United  States. 
Equality  of  taxation  and  steady  rates  of  interest  and  rent 
are  impossible  under  such  circumstances.  As  comparatively 
little  farming  land  is  under  rent  in  the  United  States,  while 
a  considerable  portion  is  under  mortgage,  both  rent,  interest, 
and  taxes  being  payable  out  of  the  same  fund,  the  amount 
of  money  seeking  such  loans  being  more  or  less  depend- 
ent upon  the  demand  on  the  part  of  manufacturer  A.  and 


INTEREST,  RENT,  AND  TAXES. 


279 


merchants  B.  and  C,  rents,  interest,  taxes,  and  net  profits 
of  a  large  amount  of  farming  land  are  more  or  less  affected 
by  the  state  of  the  demand  for  bank  loans  :  the  net  product 
of  the  producers  of  the  absolute  is  thus  more  or  less  depend- 
ent on  the  quantities  of  relative  necessaries  being  produced. 
If  the  production  of  these  is  in  the  rising  scale,  the  rate  of 
interest  is  higher ;  if  the  contrary,  lower.  But  on  the  whole 
the  rate  of  interest  on  farm  mortgages  is  comparatively 
steady. 


CHAPTER  X, 

CAPITAL,  LABOR,  AND  WAGES. 

Capital  is  the  material  on  or  out  of  which  labor  evolves 
a  product,  with  the  aid  of  tools,  machinery,  and  natural  ele- 
ments or  forces.  It  is  either  fixed  or  quick.  Fixed  capital 
embraces  land,  its  appurtenances  and  fixtures ;  it  may  appro- 
priately enough  include  also  the  tools  of  trade  which  remain 
after  the  product  is  consumed,  and  are  used  until  worn  out 
to  manufacture  similar  products.  Quick  capital  embraces  all 
other  things  to  which  the  term  Property  attaches,  excepting 
those  products  which  are  being  consumed,  or  have  been  act- 
ually purchased  for  consumption.  This  is  the  definition  of 
the  term  Capital,  as  used  in  this  chapter,  and  the  same  def- 
inition I  have  given  elsewhere,  except  that  fixed  capital  in 
its  most  abstract  sense  is  land  only.  Labor  is  either  mental 
or  physical  force,  applied  directly  or  indirectly,  personally  or 
representatively,  to  effect  and  bring  to  pass  certain  results, 
which  do  or  do  not  leave  a  tangible  and  material  form.  If 
they  do,  the  resulting  product  can  be  exchanged  directly  for 
another,  or  indirectly  through  the  universal  medium  of  a  unit, 
whose  value  is  the  result  of  carrying  out  a  convention  (either 
implied  or  expressed,  local,  national,  or  international)  to  use 
it  in  place  of  one  of  the  commodities  in  all  exchanges.  This 
medium  is  called  money,  and  consists  of  units  of  metal  or 
some  other  commodity ;  or  units  of  paper  promises  actually 
convertible  into  the  units  first  mentioned ;  units  of  the  same 
kind  not  so  convertible,  except  that  while  not  convertible  into 
metal  they  possess  extrinsic  value  by  virtue  of  their  cur- 
rency ;  or  of  units  of  money  in  the  character  of  units  of 
debt  and  credit,  receivable  and  current  in  like  manner.  In 
order  to  be  money,  however,  the  article  or  thing  used  as 


CAPITAL,  LABOR,  AND  WAGES. 


281 


money  must  be  receivable  in  exchange  for  commodities,  labor, 
and  capital,  and,  so  long  as  it  is  money,  used  for  no  other  pur- 
pose. Wages  are  the  compensation  paid  for  the  labor  before 
mentioned  by  the  owner  of  capital.  Wages  are,  therefore, 
that  part  of  capital  paid  by  the  capitalist  and  producer  to 
the  laborer  who  applies  mental  or  phj^sical  force  to  bring  to 
pass  the  results  before  mentioned,  which  the  capitalist  and 
producer  gives  the  laborer  in  exchange  for  his  labor,  and 
which  is  agreed  upon  and  fixed  as  the  laborer's  share.  Being 
agreed  upon  and  fixed,  the  laborer  runs  no  risk  of  a  market 
for  the  product ;  that  risk  is  taken  by  the  capitalist.  The 
only  risk  run  by  the  laborer  is  as  to  the  manner  of  doing  his 
work,  and  this  risk  is  for  all  practical  purposes  a  very  limited 
one.  Hence  it  ought  to  follow,  and  as  a  matter  of  fact  it 
does  follow,  that  the  laborer,  running  no  risk  of  a  market, 
being  thus  guaranteed  a  support,  and  running  no  risk  of 
bankruptcy  through  inability  to  sell  the  product  of  his  labor, 
receives  as  his  share  of  the  enlarged  or  increased  capital 
which  his  labor  brings  into  existence  a  smaller  proportion 
relatively  than  the  successful  capitalist  and  producer  on  the 
whole,  but  a  larger  share  in  proportion  than  the  unsuccessful 
one.  Men  who  perform  arduous  and  responsible  labor,  as  cler- 
g;s^men,  clerks  and  cashiers  in  banks,  conductors,  engineers  and 
other  employees  on  railroads,  receive  what  seems  sometimes 
relatively  very  small  compensation ;  but  it  is  paid  to  them, 
and  they  and  their  families  are  supported,  whether  those  who 
employ  them  lose  or  gain.  Again,  in  a  savage  and  primitive 
state  there  is  no  capital  to  be  used  in  the  employment  of 
labor,  and  if,  in  a  state  of  high  civilization,  capital  were  by 
any  means  to  be  equally  divided  between  laborers  and  capi- 
talists by  mutual  agreement,  and  could  be  kept  so  divided, 
there  could  be  no  progress  and  no  employment  of  labor  to 
any  extent.  Inequality,  therefore,  is  absolutely  essential  to 
the  employment  of  labor.  Inequality  being  thus  absolutely 
essential  to  the  employment  of  labor,  while  the  wages  of 
labor  by  the  increase  of  population  and  the  resulting  increase 
of  competition  have  a  tendency  to  become  lower,  capital  by 
a  proportionate  increase  suffers  a  like  competition,  and  is 


282 


POLITICAL  ECONOMY. 


driven  to  take  more  risk  therefore,  or  proportionately  less 
compensation.  This  increases  the  energy  of  production,  and 
by  increasing  it  gives  additional  employment  to  labor.  The 
increasing  competition  of  labor  in  old  communities  is,  there- 
fore, balanced  by  the  increasing  competition  of  capital. 
Moreover,  the  tendency  to  large  accumulations  of  capital  in 
single  hands,  has  no  directly  injurious  effects  upon  labor, 
because  the  same  number  of  laborers  is  employed,  the  same 
competition  of  capital  exists,  and  the  same  wages  are  paid, 
as  would  be  paid  were  the  accumulations  not  so  large. 
Whether  Vanderbilt  owns  a  majority  of  stock  in  the  New 
York  Central  and  Hudson  River  railroads,  or  not,  in  either 
case  the  same  number  of  hands  must  be  employed.  Labor, 
then,  has  no  direct  cause  of  quarrel  with  capital  accumulated 
to  what  seems  excess  in  single  hands.  It  is  the  minor  who 
has  a  case  against  the  major  capitalist,  if  any  case  there 
be.  That  case  I  have  fully  examined  in  other  chapters,  and 
the  most  active  cause  at  work  to  increase  the  natural  ten- 
dency to  inequalities  of  this  kind  is  excessive  production 
on  credit.  Of  all  the  causes  at  work,  in  recent  and  present 
times,  to  sink  and  destroy  the  capital  of  small  and  moderate 
capitalists,  and  build  up  other  capital  and  capitalists  on  their 
ruins,  and  to  distribute  capital  in  few  hands,  railroad  exten- 
sion has  been  the  most  potent ;  while  at  the  same  time  the 
capital  sunk  has  been  largely  expended  in  feeding  and  cloth- 
ing labor,  and  giving  it  a  surplus  to  put  in  savings  banks. 
The  only  complaint  which  labor  can  make  against  capital  is, 
that  by  employing  labor  to  excess  in  this  field  of  production 
it  has  wrecked  itself,  and  put  labor  out  of  employment  as 
the  result  of  that  excess ;  long  time  being  required  to  find 
other  fields,  and  "  hard  times  "  meanwhile  being  the  result 
for  some  laborers.  A  vast  amount  of  the  capital  of  small  cap- 
italists and  some  large  capitalists  was  sunk  in  the  Northern 
Pacific  and  other  railroads  not  long  since.  The  capital  of 
the  small  capitalists  went  into  the  pockets  of  laborers,  and 
fed  and  clothed  them  for  a  long  time,  and  their  loss  and  that 
of  the  larger  capitalists  is  largely  counterbalanced  by  the 
gain  of  land-owners.    The  capitalists  whose  capital  built  the 


CAPITAL,  LABOR,  AND  WAGES. 


283 


roads  are  the  real  losers,  then,  because  they  have  lost  a  great 
part  of  their  capital,  while  labor  has  lost  only  the  chance  of 
further  employment  in  that  field,  and  is  being  gradually 
forced  into  other  fields. 

The  chief  compensation  following  loss,  therefore,  in  these 
cases  for  capital,  is  the  new  capital  of  increased  value  of 
land.  Had  the  land  acquired  half  its  present  value  before 
the  roads  were  built,  the  building  of  the  roads  would  have 
given  the  lands  the  remaining  half,  and  the  roads  themselves 
a  large  additional  value  beside.  But  to  say  that  there  is 
any  cause  of  complaint  whatever,  for  either  labor  or  capi- 
tal, is  only  a  figurative  expression.  There  is  no  real  cause 
of  complaint  whatever  for  either.  Both  were  impelled  by 
forces  of  whose  nature  they  were  ignorant,  and  for  the  re- 
sult of  which  they  were  no  more  responsible  than  for  that  of 
a  stroke  of  lightning. 

But  while  labor  can  never  be  blamable  for  the  losses  of 
capital,  although  it  demands  and  receives  a  fixed  share  of  it 
before  it  has  demonstrated  by  sales  of  its  product  that  it  has 
earned  anything,  and  capital  can  never  be  blamable  for 
labor's  want  of  employment,  because  capital  would  surely 
employ  labor  as  long  as  it  could  do  so  with  profit,  labor  has 
serious  apparent  cause  of  complaint  against  capital,  in  being 
called  to  labor  at  nominally  high  wages  to  help  capital  pro- 
duce an  excess  of  relative  necessaries,  and  as  soon  as  a  com- 
mercial and  banking  crisis  comes,  in  being  forced  to  suffer 
the  severities  of  an  industrial  crisis.  Like  a  man  who,  jos- 
tled in  a  crowd,  turns  upon  his  next  neighbor  as  the  cause, 
when  the  latter  is  only  an  instrument  of  the  jostling  crowd 
behind  him,  labor  turns  upon  his  next  neighbor  capital,  in 
the  jostling  of  an  industrial  crisis.  The  cause  against  cap- 
ital on  the  part  of  labor  has  no  more  foundation  than  this. 
Both  capital  and  labor  have  been  called  to  the  same  place  in 
the  field  of  production  by  the  same  controlling  motive,  — 
the  appearance  of  a  profitable  investment  of  their  means. 
Manufacturers  will  continue  to  manufacture  as  long  as  they 
can  sell  to  merchants  at  a  profit,  and  most  merchants,  being 
thus  deceived,  will  continue  to  buy  as  long  as  they  are  able 


284 


POLITICAL  ECONOMY. 


to  buy,  provided  they  also  continue  to  sell  at  a  profit,  while 
laborers  will  continue  to  work  as  long  as  wages  are  rising, 
and  more  laborers  still  will  be  allured  by  the  same  cause  to 
the  same  part  of  the  field,  until  the  inevitable  crisis  arrives. 
Are  those  who  thus  act  (and  they  constitute  nearly  all  pro- 
ducers, whether  they  be  manufacturers  or  merchants,  and 
nearly  all  laborers)  to  be  blamed?  Have  they  any  just 
cause  to  blame  each  other  ?  Surely  not ;  everything  sells  at 
a  profit  to  the  producer,  and  he  is  forced  by  all  the  influences 
which  can  move  him  to  produce  more ;  an  uncommonly 
shrewd  producer  might,  and  some  producers  do  undoubtedly 
pause,  but  they  are  compelled  for  the  most  part  to  continue 
producing  or  retire,  while  laborers  see  no  reason  whatever  for 
not  going  where  apparently  increasing  profits  of  capital  and 
consequently  increasing  demand  for  laborers  seem  to  call 
them.  On  the  other  hand,  all  the  science  hitherto  attained 
and  assented  to  says  that  production  can  go  on  in  all  direc- 
tions indefinitely,  without  any  general  glut  of  products,  and 
it  says  no  more,  —  this  being  only  a  repetition  of  what  M. 
J.  B.  Say  declared  early  in  the  century.  But  while  this 
proposition  is  true,  it  is  a  mere  truism,  productive  of  no  fruit 
whatever,  and  of  no  practical  use.  On  the  contrary,  it  has 
been  highly  detrimental  so  far  as  science,  or  what  is  sup- 
posed to  be  science,  has  its  effect  on  practical  life. 

But  is  this  state  of  things  natural  ?  While  undoubtedly 
there  can  be  no  general  overproduction,  is  it  not  certain  at 
this  time  in  the  nineteenth  century  that  railroads,  although 
raising  the  value  of  land  by  a  sum  as  high  as  their  cost,  or 
very  nearly,  do  not  pay  an  average  return  for  the  capital 
invested  by  an  immense  difference  ?  Is  it  not  certain  that 
merchants  fail  from  "  shrinkage  in  values,"  and  inability  to 
sell  through  overstock,  and  from  the  same  causes  operating 
upon  those  to  whom  they  have  sold  on  credit  ?  Yes,  un- 
doubtedly ;  such  is  unquestionably  the  case ;  and  it  is  un- 
doubtedly true  that  it  arises  from  credit  of  some  kind,  while 
it  is  certain  it  does  not  arise  from  credit  of  an  ordinary  kind, 
as  I  have  before  amply  shown.  An  industrial  crisis  is  a  real 
and  not  an  imaginary  affair,  and  it  arises  not  from  moral 


CAPITAL,  LABOR,  AND  WAGES. 


285 


causes  ;  not  from  any  deliberate  design,  any  kindness  or  un- 
kindness,  good  motives  or  evil  motives,  on  the  part  of  either 
producers  or  laborers.  To  repeat  such  unmeaning  nothings 
is  a  useless  business,  if  we  desire  to  reach  the  true  science  of 
the  case.  It  arises,  undoubtedly,  in  a  highly  artificial  state  of 
credit.  All  this  is,  however,  mere  language  without  definite 
meaning,  unless  followed  by  a  rigorous  analysis  of  the  credit 
used.  It  comes  not  from  ordinary  personal  credit  between 
man  and  man  ;  the  credit  must  be  of  an  artificial  charac- 
ter, and  it  can  only  arise  from  bank  loans,  because  ordinary 
loans  are  not  in  excess  of  commodities  sold,  in  the  absence 
of  banks.  The  cause  of  that  kind  of  overproduction  which 
leads  to  an  industrial  crisis  must  therefore  lie  in  bank  loans. 

But  wages  are  paid  out  of  capital  before  the  products  of 
labor  are  sold  ;  and  if  capital  is  borrowed  in  the  shape  of 
money  through  bank  loans,  wages  are  paid  out  of  that  money. 
As  money  has  been  shown  to  be  substitute  capital,  as  well  as 
substitute  commodity,  utterly  useless  for  any  purpose  but  to 
exchange  capital,  commodities,  and  labor,  and  hence  having 
no  producing  element  in  itself,  the  question  is :  Can  money 
be  put  in  circulation,  or,  in  other  words,  exchanged  a  second 
or  third  time,  for  labor  to  produce  the  same  kind  of  commod- 
ity, before  any  sales  of  the  commodity  take  place,  without 
increasing  so  far  the  circulation  of  all  money,  as  compared 
with,  or  set  off  against,  all  commodities  actually  sold  and  con- 
sumed (the  commodities  produced  by  the  laborers  being 
thus  far  entirely  out  of  the  market),  and  without  diminishing 
at  the  same  time  the  total  of  all  commodities  obtained  with 
their  wages,  and  consumed  meantime  by  the  laborers  to  an 
extent  below  what  could  have  been  the  case  had  they  not 
been  paid  their  wages  on  credit  to  produce  on  credit  what 
has  not  been  sold  ? 

The  sole  original  use  of  money  being  to  exchange  com- 
modities and  capital  for  each  other,  or  for  labor,  to  produce 
a  commodity  which  can  be  exchanged  with  a  profit  for  the 
money  back  again ;  to  pay  out  fifty  dollars  a  second  or  third 
time  for  labor  to  produce  a  ton  of  iron,  when  a  ton  of  iron 
produced  by  labor  in  exchange  for  the  same  fifty  dollars  the 


286 


POLITICAL  ECONOMY. 


first  time,  or  even  the  second  time,  remains  on  hand  unsold, 
is  to  circulate  the  money  on  credit,  in  excess  of  its  natural 
and  ordinary  circulation  or  exchange,  as  a  substitute  com- 
modity, because  the  substitute  appears  for  a  long  period 
four  times  or  six  times  as  often  as  its  principal  instead  of 
only  twice.  It  is  also  to  produce  on  credit,  and  in  excess  of 
the  production  and  consumption  of  other  commodities,  except 
so  far  as  their  production  may  be  in  like  predicament ;  and 
the  more  this  is  the  case  the  greater  and  more  extensive  is 
production  on  credit.  This  kind  of  circulation  and  this  kind 
of  production  are  thus,  by  rigorous  analysis,  clearly  shown 
to  be  precisely  equivalent  in  character  and  in  ultimate  al- 
though not  immediate  effect  to  loans  made  by  bankers  to 
producers  in  the  shape  of  necessaries  to  be  paid  to  laborers 
and  producers  of  raw  material  before  the  product  appears. 
Such  loans  in  produce  could  not  be  very  extensive  ;  and  if 
they  were  half  as  extensive  as  those  made  now  with  the 
money  of  depositors,  the  necessaries  consumed  would  rise, 
and  the  articles  overproduced  would  fall,  and  stop  all  further 
loans  until  the  products  were  mostly  sold.  Gold  and  silver 
money,  whether  in  the  shape  of  units  coined  by  government, 
units  coined  by  individuals,  units  of  weight  weighed  by 
buyer  and  seller  at  each  sale,  or  units-  of  metal  of  any  kind, 
whose  accumulations  are  so  large  that  the  annual  product, 
compared  with  total  past  accumulations,  gives  a  ratio  not 
much  in  excess  of  the  annual  increase  of  commerce  as  com- 
pared with  the  commerce  of  preceding  years,  cannot,  so 
long  as  it  remains  distributed  throughout  the  commercial 
world  as  commerce  left  it,  be  put  in  circulation  by  its  owner, 
or  by  a  borrower  from  him,  more  than  twice,  or  occasionally, 
and  for  very  short  periods  only,  four  times  as  often  as  its 
principal,  in  particular  instances.  On  the  average,  it  cannot 
be  put  in  circulation  three  times,  or  even  twice  and  a  half  as 
often.  Manufacturer  A.  borrows  of  capitalist  B.  in  France, 
10,000/.,  makes  20,000  yards  of  cotton  cloth,  and  sells  it  to 
merchant  C,  who  borrows  the  money  of  capitalist  D.,  and 
500/.  besides,  to  pay  for  the  goods  as  well  as  A.'s  profits, 
who  then  pays  his  loan  to  capitalist  B.,  while  manufacturer 


CAPITAL,  LABOR,  AND  WAGES. 


287 


A.  makes  21,000  yards  more  of  like  cloth  before  merchant 
C.  has  sold  any  of  the  first  cloth.  But  manufacturer  A.  can 
never  expend  on  labor  and  material  all  the  money  he  has 
borrowed  in  making  cotton  cloth,  and  then  without  selling 
that  cloth  pay  up  the  money  he  borrowed  to  make  it  from 
capitalist  B.,  without  borrowing  from  capitalist  D.,  E.,  or  C, 
and  diminishing  by  the  precise  amount  thus  borrowed  of  D., 
E.,  or  C,  the  total  of  money  on  hand  everywhere  to  loan. 
In  other  words,  his  overstock  represents  precisely  so  much 
money  taken  out  of  the  loan  market  from  B.,  and  from  D.,  E., 
or  C,  to  a  franc  ;  and  when  he  sells  and  as  he  sells,  will,  pre- 
cisely to  a  franc,  so  much  money  be  carried  back  to  the  loan 
market  by  payment  of  A.'s  loan  to  B.  and  D.,  E.,  or  C. ;  and 
the  power  of  loaning  is  so  far  restored.  The  exact  amount 
taken  out  of  the  loan  market  is  thus  carried  back  to  the  loan 
market,  and  the  total  circulation  of  money  is  not  increased 
by  all  the  transactions  taken  together.  The  power  of  loan- 
ing is  limited  and  measured  by  actual  sales  for  consumption. 
To  a  very  slight  extent,  and  for  a  very  short  time,  manu- 
facturer A.  has,  by  borrowing  from  capitalist  D.,  E.,  or  C, 
enabled  his  laborers  to  exchange  their  money  wages  for  neces- 
saries twice  before  the  product  of  their  labor  is  sold,  and  the 
manufacturer  has  caused  his  first  10,000/.  to  make  four  ex- 
changes —  twice  in  payment  to  his  laborers,  and  twice  by 
payment  of  their  wages  for  necessaries  —  before  selling  any 
of  his  product ;  but  his  progress  is  soon  stopped,  because  in  a 
short  time  his  note  or  bill  to  the  first  capitalist,  B.,  must  be 
paid.  Expansion  of  money  circulation,  to  any  great  extent, 
that  is  to  say,  of  the  use  of  the  conventional  commodity 
money,  in  place  of  the  real  commodity  cotton  cloth,  beyond 
the  actual  circulation  of  commodities  —  in  other  words,  act- 
ual sales  for  consumption  —  is  thus  for  all  practical  purposes 
impossible,  and  cannot  be  carried  any  farther  than  loans 
or  advances  of  capitalists  in  the  shape  of  wheat,  provisions, 
vegetables,  shelter,  and  coarse  clothing  could  be  made  to 
manufacturers  and  other  producers,  if  barter  could  be  and 
were  in  general  use  in  highly  productive  communities  like 
those  of  France,  England,  and  the  United  States.  Gold, 


288 


POLITICAL  ECONOMY. 


silver,  or  other  metallic  money,  freely  coined  by  govern- 
ments, without  seignorage,  or  for  only  a  small  seignorage, 
sufficient  to  pay  expenses,  gives  therefore  very  nearly  or 
quite  as  stable  an  equilibrium  of  exchanges,  and  therefore 
of  production  and  labor,  and  consequently  of  wages,  as  bar- 
ter could  do  under  any  circumstances.  With  such  a  cur- 
rency as  well  as  with  barter,  there  can  be  comparatively 
little  production  on  credit  at  any  one  time,  although  all  the 
money  capital  in  the  country,  as  fast  as  it  comes  to  hand  for 
loan,  and  which  consists  of  gold  and  silver  actually  in  the 
hands  of  capitalists  A.,  D.,  E.,  F.,  etc.,  can  be  safely  used  to 
stimulate  and  promote  production.  The  manufacturer  runs 
comparatively  little  risk  as  a  producer,  and  such  must  there- 
fore be  the  case  with  the  merchant  who  is  the  next  producer 
in  order. 

The  wages  of  labor  paid  by  the  manufacturer  out  of  his 
own  money,  or  out  of  the  money  he  borrows  from  the  capi- 
talist, although  paid  in  advance,  are  soon  reimbursed,  be- 
cause they  are  paid  out  of  the  cash  proceeds  of  labor's  prod- 
ucts actually  sold  for  consumption,  and  are  immediately 
handed  over  to  him  who  advanced  them. 

This  is  an  exact  and  rigorous  analysis  of  the  actual  facts 
which  make  metallic  units  freely  coined  and  distributed  and 
not  placed  in  banks  the  safest  possible  currency.  It  is  be- 
cause they  cannot  be  used  to  force  production  on  the  whole 
much  faster  than  they  are  used  to  cause  consumption ;  be- 
cause production  on  credit  is  kept  in  check  by  them,  and 
therefore  prices  and  wages  are  steady ;  and  not  because  they 
are,  as  falsely  alleged,  ordinary  commodities,  that  they  are 
the  safest  and  soundest  currency  in  the  world. 

The  wages-fund,  with  the  use  of  such  money  and  such 
loans,  consists  of  money  actually  received  on  sales  of  labor's 
product,  and  money  borrowed  but  soon  repaid.  All  the 
money  which  constitutes  the  wages-fund,  therefore,  arises 
from  sales  of  commodities  which  have  actually  taken  place 
or  will  soon  take  place.  The  capital  which  sustains  the  fund 
is  the  total  capital  of  all  sorts  belonging  to  the  manufacturer 
or  other  producer,  plus  the  average  money  capital  loaned 


CAPITAL,  LABOK,  AND  WAGES. 


289 


from  the  capitalist,  in  the  shape  of  metallic  and  paper  units 
which  have  just  been  exchanged  for  commodities  to  be  con- 
sumed, and  therefore  entitle  the  capitalist  to  exchange  them 
himself,  or  allow  others  to  exchange  them  for  like  commod- 
ities, or  for  labor  and  material  to  produce  like  commodities, 
in  place  of  those  whose  consumption  caused  the  money  thus 
loaned  to  be  paid  to  the  capitalist.  The  advantage  possessed 
by  labor  under  this  system  is  not  that  gold  and  silver  are 
any  better  in  and  of  themselves  than  bank-notes,  not  that 
it  runs  less  risk  of  being  paid  wages  as  long  as  it  works,  — 
for  labor  is  always  paid,  —  but  in  the  steadiness  of  nominal 
wages,  steadiness  of  actual  wages,  and  security  of  contin- 
uous employment.  It  is  hard  to  eradicate  the  idea  that  all 
this  comes  from  being  paid  only  in  gold  and  silver  because 
the  metal  is  an  end  in  itself,  and  not  in  small  bank-notes, 
or  paper  money  of  any  kind  ;  but  I  will  now  proceed  to 
utterly  disprove  the  soundness  of  this  idea,  by  showing  how 
wages  are  paid  in  gold  and  silver  altogether,  or  bank-notes 
altogether,  under  a  fully  developed  system  of  production  on 
credit.  Whether  gold  and  silver,  or  bank-notes,  pay  the 
wages  is  immaterial,  because  production  can  be  carried  on 
upon  credit,  and  wages  can  be  borrowed,  as  easily  through 
gold  and  silver  as  paper. 

THE  CREDIT  WAGES-FUND. 

Mr.  Mill  writes  of  a  Wages-Fund,  particularly  devoted  to 
the  payment  of  wages,  and  set  apart  as  it  were  for  that  pur- 
pose. In  one  sense  this  is  true.  Wages  are  the  income  of 
labor,  and  most  producers  (which  laborers  are  in  a  general 
sense)  spend  all  but  a  small  fraction  of  their  income.  Wages 
are  then  the  guarantied  income  of  labor  for  its  share  of  the 
gross  profits  of  production.  Wages  differ  from  income,  how- 
ever, in  the  fact  that  they  are  a  large  item  of  those  gross 
profits  which  have  to  be  deducted  before  net  profits  are 
ascertained  ;  and  if  gross  profits  are  insufficient,  wages  must 
be  paid  out  of  capital.  In  other  words,  capital  advances  the 
wages,  and  is  paid  out  of  gross  profits,  after  waste  and  de- 
terioration of  plant  are  made  good.    If  nothing  then  re- 

19 


290 


POLITICAL  ECONOMY. 


mains,  there  is  no  profit.  If  the  remainder  is  large  and  in- 
creasing, more  labor  and,  therefore,  increasing  wages  result ; 
but  this  tendency  is  counteracted,  more  or  less,  by  the  com- 
petition between  laborers.  If  the  remainder  is  small  and 
decreasing,  decreasing  wages  result.  But  equilibrium  can 
be  maintained  by  what  may  be  called  the  natural  as  distin- 
guished from  what  may  be  called  the  artificial  or  bank  cir- 
culation of  money,  as  before  described.  The  wages-fund, 
then,  is  for  all  practical  purposes  a  guarantied  portion  of 
gross  profits  paid  in  advance ;  for  when  wages  have  to  be 
paid  indirectly  out  of  that  part  of  capital  called  "  plant,"  be- 
cause gross  profits  do  not  leave  sufficient  after  paying  labor 
to  pay  for  waste  and  deterioration,  production,  and,  there- 
fore, wages  soon  stop,  unless  production  can  be  carried  on 
upon  credit  in  such  a  manner  by  loans  as  to  give  all  the 
overstock  in  the  hands  of  the  producer,  and  of  those  to  whom 
he  has  sold  for  cash  obtained  by  bank  loan,  the  appearance 
of  a  total  of  gross  profits,  sufficient  to  leave,  after  the  usual 
deductions,  an  apparent  amount  of  net  profits.  If  this  can 
be  done,  wages  paid  under  these  conditions  are  reimbursed, 
not  out  of  gross  profits  but  really  out  of  subsequent  loans, 
and  waste  and  deterioration  are  made  good  in  the  same  way , 
and,  in  the  winding  up,  loans  are  paid  out  of  the  real  gross 
profits  in  the  shape  of  overstock  and  debts  due  on  credit 
sales  of  overstock,  falling  back  on  fixed  capital  in  the  shape 
of  plant  for  any  deficiency.  This  is  the  credit  wages-fund, 
and  it  is  supplied  by  bank  and  other  loans.  I  say  other  loans, 
because  after  deposit  and  discount  banks  are  established,  all 
other  loans,  including  those  of  individuals  and  savings  banks, 
are  auxiliary  to  bank  loans  in  producing  the  grand  result. 
If  bank  A.  loans  to  manufacturer  B.  ten  thousand  pounds  in 
gold  sovereigns  and  silver  change,  to  pay  laborers  to  make 
five  hundred  thousand  yards  of  cotton  cloth,  and  manu- 
facturer B.  sells  the  same  to  merchant  C,  who  pays  the  ten 
thousand  pounds  with  profits  to  B.  for  the  cloth,  out  of  money 
actually  received  for  goods  which  have  gone  into  consump- 
tion, the  new  goods  in  the  shape  of  five  hundred  thousand 
yards  of  cotton  cloth  were  wanted,  and  their  sale  to  C.  enables 


CAPITAL,  LABOR,  AND  WAGES. 


291 


B.  to  pay  his  bank  loan.  No  more  goods  were  produced  than 
were  warranted  by  actual  consumption.    But  if  merchant 

C.  borrows  the  ten  thousand  sovereigns  and  enough  more  to 
cover  B.'s  profits,  from  a  bank,  though  it  should  put  in  cir- 
culation nothing  but  gold  and  silver,  manufacturer  B.  has 
merely  procured  C.  to  take  the  goods  and  at  the  same  time 
assume  his  place  in  bank,  by  putting  his  note  or  bill  there 
for  discount,  and  with  the  proceeds  enabling  B.  to  pay  the 
bank.  This  last  case  is  exactly  the  case  before  mentioned, 
where  manufacturer  A.  in  France  borrowed  of  capitalist  B. 
ten  thousand  francs  to  make  cotton  cloth,  and  before  selling 
it  borrowed  of  capitalist  C.  a  like  amount  to  make  as  much 
more  cloth,  without  selling  the  first  cloth,  because  manu- 
facturer B.  now  borrows  in  bank  the  sum  of  ten  thousand 
sovereigns,  and  makes  as  much  more  cloth,  before  merchant 
C,  to  whom  he  sold  the  first  cloth,  has  sold  a  single  yard  for 
consumption.  The  cases  look  alike,  and  in  both  the  mer- 
chant and  the  manufacturer  hold  each  one  half  of  all  the 
goods.  In  both  cases  all  the  goods  remain  unsold  to  con- 
sumers, and  the  difference  is  only  nominal.  Wherein,  then, 
lies  the  real  difference  between  the  two  cases?  The  same 
amount  of  goods  was  produced  on  credit  in  each  case,  the 
same  amount  remains  unsold  in  each  case,  and  in  each  case 
gold  and  silver  money  were  alone  used.  The  two  cases  look 
much  alike  to  ordinary  observers,  but  they  are  cases  clearly 
put  for  close  and  careful  examination,  to  enable  the  reader 
with  all  the  force  of  demonstration  itself  to  perceive  the  dif- 
ference between  producing  on  credit  by  loan  of  gold  and 
silver  without  any  banks  of  deposit  and  discount  existing, 
and  producing  on  credit  by  loan  where  such  banks  exist. 

In  the  case  in  France,  manufacturer  A.  could  not  borrow 
the  second  time,  while  his  goods,  produced  by  means  of  a 
loan  the  first  time,  remained  unsold,  without  reducing  to  the 
precise  extent  of  that  second  loan  all  the  money  on  hand  to 
loan,  because  the  power  to  loan  of  capitalist  D.,  from  whom 
he  borrowed,  was  reduced  to  a  franc  exactly  hj  that  loan  ; 
but  in  the  other  case,  the  power  to  loan  on  the  part  of  all 


292 


POLITICAL  ECONOMY. 


the  banks  was  not  reduced  by  the  amount  of  the  loan  made, 
because  they  continue  to  loan  up  to  a  crisis.  The  same  bank 
could  loan  the  same  amount  next  day  by  means  of  a  deposit 
from  depositor  G.,  who  notwithstanding  the  deposit  can  and 
does  produce  himself  and  pay  labor,  or  make  loans  to  other 
producers  for  that  purpose  precisely  as  if  he  had  never  made 
any  deposit  at  all ;  and  beside  all  this,  the  banks  can  expand 
loans  according  to  demand.  All  bank  loans  above  average, 
therefore,  —  which  average  represents  the  only  "  real  econ- 
omy of  metal,"  —  are  loans  made  to  producers  on  credit,  in 
excess  of  all  loans  which  ought  to  be  made.  But  a  state  of 
average  loans  is  a  state  of  average  reserve.  Hence  we  come 
by  another  kind  of  analysis  to  what  has  been  repeatedly  de- 
monstrated directly  or  by  synthesis,  as  well  as  by  analysis, 
that  to  make  production,  consumption,  and  prices  steady ;  to 
give  labor  steady  employment  with  steady  wages  in  that 
part  of  the  field  of  production  to  which  it  has  been  invited  ; 
to  make  less  iron  and  cloth  and  fewer  railroads  on  credit ;  to 
invite  fewer  laborers  to  large  cities  and  towns  to  work  on 
municipal  improvements  with  borrowed  money  at  enormous 
wages ;  to  carry  back  to  agriculture  the  surplus  population  of 
large  cities  and  towns,  —  as  far  as  it  is  possible  to  effect  these 
objects  by  the  regulation  of  the  "circulating  medium,"  — 
a  fixed  ratio  of  coined  metal  to  deposit  and  discount-bank 
debt  must  be  maintained,  otherwise  there  is  comparatively 
small  advantage  in  a  reserve.  If  the  Bank  of  Amsterdam 
could  have  maintained  its  total  of  credits  at  the  same  vol- 
ume, without  coin  on  deposit  for  every  unit  of  credit  stand- 
ing on  its  books,  the  result  would  have  been  equally  benefi- 
cial ;  and  why  ?  For  the  reason  repeatedly  given  already, 
that  not  a  single  unit  of  that  credit  could  be  paid  out  for 
labor  or  commodity  which  was  not,  when  last  before  paid 
out,  paid  for  commodities  actually  going  into  consumption. 
Apply  the  same  test  to  our  deposit  and  discount  banks. 
These  banks  loan  the  money  of  their  customers,  and  the 
sum  total  of  their  loans  is  the  total  of  deposits  minus  total 
bank  reserve.    This  total  of  loans,  therefore,  is  so  much  in 


CAPITAL,  LABOR,  AND  WAGES. 


293 


excess  of  all  the  loans  for  producing  and  commercial,  or,  in 
one  word,  producing  purposes,  which  could  have  been  made 
in  the  absence  of  banks,  subject  to  a  discount  of  one  item 
which  is  a  matter,  not  like  bank  loans  presenting  exact  fig- 
ures, but  a  quantity  to  be  estimated.  This  item  consists  of 
the  credit  balances  standing  to  the  credit  of  merchants  on 
bank  books  and  resulting  from  loans  in  bank,  which  the 
borrowing  merchants  have  not  yet  drawn  upon.  These 
balances  have  had  no  influence  upon  production,  because 
never  used.  Subject  to  this  deduction,  and  an  allowance  for 
loans  made  accidentally  or  otherwise  to  non-producers,  bank 
loans  in  England  as  well  as  in  the  United  States  show  with 
mathematical  certainty  in  the  footings  of  bank  books  the 
respective  national  totals  of  production  on  credit,  in  excess 
of  the  production  which  would  suffice  to  fill  the  void  caused 
by  all  the  consumption  which  has  taken  place  while  the  ex~ 
cess  was  being  created.  This  expansion  of  production  in 
excess  of  consumption  answers  precisely  to  what  I  have  in 
another  chapter  called  expansion  of  circulation  in  excess  of 
a  corresponding  contraction.  It  is  using  the  substitute  com- 
modity money,  not  merely  to  exchange  all  the  commodities 
which  consumers  are  ready  to  take  and  do  take,  and  also  to 
pay  labor  for  producing  as  fast  as  consumers  create  a  void  to 
be  filled,  but  to  an  excess,  measured  precisely  by  the  sum 
total  of  bank  loans  and  a  portion  of  savings  bank  loans,  sub- 
ject to  the  foregoing  deductions.  •  The  sum  total  of  loans 
which  would  suffice  to  fill  this  void,  and  keep  it  filled  but  not 
overflowing,  consists  of  all  loans  made  for  this  purpose  by 
those  who  are  neither  depositors  nor  stockholders  in  banks, 
and  which  would  be  made  by  those  who  are  either  depositors 
or  stockholders,  in  the  absence  of  banks.  Hence  it  follows 
that  the  vast  sums  paid  as  wages  out  of  bank  loans  are  bor- 
rowed by  the  producers,  whether  they  be  manufacturers, 
merchants,  railroad  builders  or  contractors,  contractors  for 
municipal  improvements,  city  houses,  and  warehouses,'  etc., 
etc.,  on  the  guaranty  of  bankers,  who  borrow  of  their  depos- 
itors on  the  pledge  of  bank  capital  the  use  of  their  money 
to  give  it  an  additional  circulation  over  and  above  what  they 


294 


POLITICAL  ECONOMY. 


give  it  themselves,  to  pay  the  laborers  while  producing  this 
excess  and  thus  enabling  them  to  maintain  themselves,  and 
reserve  large  savings  out  of  labor  meanwhile,  which  largely 
appear  in  savings  banks  together  with  loans  made  by  indi- 
viduals out  of  profits  on  goods  sold,  but  not  to  consumers. 
These  savings,  deposited  by  labor  in  savings  banks  and  by 
the  latter  in  deposit  and  discount  banks,  are  largely  loaned  to 
producers  again  by  savings  banks,  and  thus  increase  by  their 
total  the  excess  of  production  on  credit  before  mentioned. 
This  increase  is  equal  to  the  total  of  savings  bank  loans  de- 
voted to  the  purpose  named,  and  appears  only  on  savings  bank 
books.  The  total  of  bank  loans  subject  to  the  two  deductions 
before  mentioned,  and  the  total  of  savings  bank  loans  used  in 
the  manner  stated,  together  with  loans  out  of  profits  before 
mentioned,  cause  production  in  excess  of  consumption  to  take 
place  until  stopped  by  a  commercial  and  industrial  crisis. 
All  the  raw  material,  and  all  the  labor  used  to  create  this 
excess  of  production,  will  be  found  embodied  in  these  totals. 
Hence  it  follows  that  all  the  wages  of  labor  employed  by 
capital  in  producing  the  raw  material,  and  all  the  profits  of 
the  capital  itself,  have  been  furnished  by  borrowing  indi- 
rectly the  necessaries  consumed  on  the  part  of  the  produc- 
ers and  laborers,  guarantied  by  bankers.  If  this  be  true,  the 
failure  of  the  producers  must  be  the  loss  of  depositors.  But 
this  is  not  the  case  usually,  and  never  can  be  the  case  as 
long  as  bank  capital  is  sufficient  to  pay  the  losses.  Hence, 
by  a  reductio  ad  absurdum,  the  proposition  that  depositors 
have  furnished  wages  and  profits  is  found  to  be  false,  be- 
cause it  is  only  upon  the  contingency  of  exhaustion  of  bank 
capital  that  depositors  lose.  But  borrowing  producers  owe 
banks  to  the  extent  of  the  excess  of  production  over  con- 
sumption, and  bankers  owe  depositors  a  like  amount  in  ex- 
cess of  the  reserve  they  have  on  hand  to  pay  with.  Hence 
it  follows  that  what  banks  loan  to  all  customers,  whether 
they  are  producers  as  well  as  consumers,  or  consumers  only, 
is  that  extra  and  additional  circulation  or  use  of  money  as  a 
conventional  commodity,  and  at  the  same  time  unit  of  val- 
uation, purchase,  and  payment,  which  is  in  excess  of  all  the 


CAPITAL,  LABOR,  AND  WAGES. 


295 


circulation  or  use  of  the  money  the  depositors  make  for 
themselves  either  in  purchases  or  loans  ;  and  Jier^c^p  ir^  epc-  ,  ; 
cess  of  all  consumption  that  has  taken  place,  beijauser  ,in,  I 
excess  of  all  the  exchanges  of  commodities;  fof ^thafc  purpsse.j  ] 
The  result  of  it  all  as  shown  by  analysis^  i^^  ijiat  jslouey;;  , 
being  a  conventional  commodity,  its  natural  fw^d,  legit^i^natQ  ^  , 
use  is  to  exchange  all  real  commodities  wante<^,^liy,pj:D^u)piDg,''' ^ 
consumers,  and  to  supply  through  wages  and  loans  the  void 
created  by  consumption.    If  it  is  used,  as  it  may  be,  out  of 
a  large  consolidated  reserve,  composed  of  a  series  of  individ- 
ual reserves,  by  bankers  in  the  way  of  loans  to  producers, 
these  borrow  for  themselves  and  their  laborers,  and  the 
laborers  and  capitalists  who  have  produced  the  raw  mate- 
rial, the  necessaries  they  have  consumed ;  and  their  capital 
stands  pledged  to  pay  back  the  same  in  the  shape  of  money 
received  for  their  products  actually  consumed.    They  bor- 
row money  to  circulate  in  excess  of  consumption,  and  yet 
can  only  refund  it  in  exact  proportion  to  consumption. 
The  surplus  of  money  over  and  above  the  consumption  of 
the  producers  and  laborers  who  have  produced  the  raw  mate- 
rial, and  of  the  laborers  who  have  worked  it  up  into  its  pres- 
ent state,  appears  in  the  shape  of  money,  which  from  the 
hands  of  the  last  class  of  laborers  may  go  into  savings 
banks  to  stimulate  still  further  the  production  of  the  excess 
already  on  hand,  and  from  the  hands  of  the  producers  of  raw 
material  may  go  to  increase  the  capital  devoted  to  the  pro- 
duction of  raw  material. 

Here  lies  open  before  us  the  true  grievance  of  labor. 
There  is  no  real  capital  behind  the  money  thus  loaned  by 
banks  in  excess  of  consumption.  Hence  they  loan  no  real 
capital.  Money  can  only  take  the  place  of  its  principal ;  it 
can  do  no  more  without  borrowing  under  its  semblance  of 
money  commodities,  for  which  it  has  no  commodities  to  offer 
in  exchange.  The  wages  of  labor  paid  out  of  bank  loans, 
are  borrowed  by  the  producers  out  of  commodities  already 
on  hand  and  to  be  produced,  which  consumers  will  certainly 
want,  and  will  therefore  take ;  and  their  capital  is  pledged 
first  for  the  payment ;  the  capital  of  the  bankers  is  pledged 


296 


POLITICAL  ECONOMY. 


next ;  and  tliat  of  depositors  last.  The  real  wages-fund  in 
^,ny;kii^(f  b"f  broduction,  therefore,  is  that  part  of  the  prod- 
ucts Ox  his*  cwn- labor  which  the  laborer  will  consume  himself, 
and  'thftt  patt  ^hM\  other  producers  will  take  in  exchange. 
Beyond  this,  "the  "Mborer  can  only  be  paid  by  borrowing. 
He',  £,"5  ^Ml'?i&  his  friend,  the  capitalist  and  producer,  tread 
oil '  dangerous -ground  when  the  rising  scale  of  bank  loans 
shows  a  rising  scale  of  production.  Without  a  fixed  point 
in  the  reserve  about  midway  between  the  highest  and  lowest 
production,  above  which  loans  cannot  go,  production  must 
continue  until  it  and  labor  suffer  a  collapse.  Capital  and 
labor  engaged  in  such  production  have  no  cause  of  quarrel, 
but  of  sympathy.  The  capitalist  may  become  bankrupt, 
and  the  laborer  thus  set  adrift  and  forced  to  other  parts  of 
the  field,  but  neither  is  to  be  blamed.  The  whole  subject  is 
so  complex,  and  intricate  because  complex,  that  it  is  no  won- 
der that  neither  capitalist  nor  laborer  have  the  slightest  con- 
ception of  the  forces  at  work  beneath  them. 

With  a  steady  reserve  everywhere  in  all  banks,  stopping 
loans  at  the  same  point  in  every  bank,  comparatively  steady 
production  and  wages  would  follow,  because  paying  for  labor 
and  raw  material  on  credit  would  be  stopped  everywhere  at 
the  same  stage ;  and  in  a  period  of  ten,  fifteen,  or  twenty 
years,  more  production,  followed  by  actual  sales,  would  take 
place  than  now.  The  United  States  have  now  arrived  at 
that  point  where  the  protection  they  really  need  is  that  of  a 
sound  currency  and  steady  prices.  This  would  protect  pro- 
ducers b}^  the  absolute  exclusion  of  articles  which  they  now 
only  partially  supply,  and  carry  the  amount  now  paid  in  tar- 
iffs on  importations  of  such  articles  over  to  others  upon 
which  it  would  naturally  fall. 

This  is  the  true  remedy  and  the  true  protection  which 
would  follow  a  duly  regulated  reserve.  Labor  is  now  bear- 
ing in  company  with  capital  the  losses  and  suffering  result- 
ing from  unrestrained  production  on  credit,  in  excess  of  con- 
sumption ;  and  the  common  grievance  of  both  is,  that  the 
use  of  money  under  the  system  of  bank  loans  is  so  complex  a 
matter  that  not  only  all  bankers  and  merchants,  but  all 


CAPITAL,  LABOR,  AND  WAGES. 


297 


writers,  have  been  deceived  as  to  its  true  character.  Mill 
and  Price  say,  as  the  final  result  of  their  examinations,  that 
what  acts  on  prices  is  credit,  whatever  form  it  may  assume, 
and  that  a  bank  deals  in  credit ;  and  their  opinion  is  openly 
followed  by  most  writers  in  the  United  States,  and  seems  to 
be  contradicted  by  none.  Until  these  two  erroneous  propo- 
sitions are  admitted  to  be  false,  and  the  two  propositions 
which  I  have  demonstrated  to  be  true,  and  have  offered  as  a 
substitute  for  them,  are  admitted  and  acted  on,  the  most 
important  object  to  be  gained  by  a  banking  reserve  —  the 
regulation  of  production  on  credit  —  will-  be  lost.  Those 
two  propositions,  are,  that  it  is  not  credit,  but  production 
on  credit  which  raises  general  prices ;  that  a  bank  does  not 
deal  in  ordinary  credit,  nor  in  fact,  to  speak  with  rigorous 
accuracy,  any  kind  of  credit  whatever.  So  long  as  it  keeps 
a  reserve  equal  to  any  call  made  upon  it,  and  continues  to 
do  business,  it  loans  to  its  customers  money  for  circulation, 
in  excess  of  all  circulation  that  could  or  would  take  place 
were  no  bank  loans  ever  made ;  and  therefore  in  excess  of  all 
commodities  actually  exchanged  —  that  is  to  say,  sold  for 
consumption.  Because  the  produce  of  the  labor  purchased 
by  means  of  this  extra  circulation  will  not  sell  to  consumers, 
the  result  is  the  same  in  raising  prices  as  if  the  bank  had 
loaned  the  money  to  non-producers,  who  by  consuming  con- 
stantly without  producing  anything  would  be  all  the  time 
reducing  the  total  of  articles  actually  consumed,  and  at  the 
same  time  increasing  continually  the  circulation  of  money 
(buying),  and  thus  raising  general  prices ;  and  in  no  other 
way  can  that  indispensable  condition  of  overproduction  (rise 
of  general  prices)  be  brought  into  existence.  Ordinary 
credit,  like  credit  between  merchants,  arises  entirely  from  a 
sale  of  merchandise  on  time.  If  no  bank  discount  follows 
such  a  sale,  and  the  seller  retains  the  debt  arising  from  the 
sale,  whether  it  be  evidenced  by  entry,  bill,  or  note,  this,  like 
all  other  sales  of  a  like  kind,  operates  only  on  the  price  of 
the  merchandise  sold ;  it  does  not  raise  general  prices. 
Hence,  inasmuch  as  bank  loans  cause  overstock  which  will 
not  sell,  if  the  loans  were  a  matter  of  ordinary  credit, — if 


298 


POLITICAL  ECONOMY. 


the  purchases  of  necessaries  made  by  laborers  and  producers 
with  the  proceeds  of  the  loans  were  like  ordinary  purchases 
on  credit,  —  the  effect  would  be  to  raise  the  price  of  the  nec- 
essaries so  bought  and  consumed  07ily^  and  to  lower  and  de- 
press the  prices  of  the  articles  in  overstock.  But  the  actual 
fact  is,  that  all  prices  rise,  including  articles  like  those  in 
overstock,  so  far  as  these  are  sold  to  consumers.  Herein  lies 
the  exact  reason  why  the  phenomenon  of  a  general  rise  of 
prices  occurs,  and  makes  actual  depreciation  which  exists  in 
the  overstock  —  sure  to  be  demonstrated  when  it  is,  as  it  at 
some  time  inevitably  will  be,  forced  on  the  general  market 
of  consumers  —  appear  for  a  long  time  like  actual  apprecia- 
tion. It  would  be  a  blessed  fact  for  labor,  as  well  as  capital, 
if  banks  could  be  made  to  deal  only  in  credit  like  that  of 
merchants,  if  that  credit  would  pass  instead  of  gold  and  sil- 
ver or  bank-notes.  There  would  be  no  need  of  a  reserve, 
and  there  could  be  no  overproduction,  because  all  goods  like 
those  in  overstock  would  immediately  fall  in  price  as  fast  as 
the  necessaries  consumed  in  producing  the  overstock  could 
rise  in  price.  But  the  contrary  of  all  this  is  the  case,  be- 
cause there  is  no  bank  credit,  and  no  merchant's  or  other  pro- 
ducer's credit  circulated  or  used.  The  producer  borrows  the 
money,  either  in  gold  and  silver  or  bank-notes,  out  of  what 
is  called  bank  reserve,  and  pays  it  out  for  labor  and  for  raw 
material,  which  is  the  product  of  labor  and  capital,  and  it  is 
then  largely  expended  in  the  purchase  of  necessaries.  Al- 
though the  laborers  and  producers  actually  pay  gold  and  sil- 
ver for  all  that  they  consume,  and  so  in  common  parlance  do 
not  owe  a  cent  for  what  they  have  thus  consumed,  in  the 
grand  national  economy  of  exchange  they  have  purchased 
these  things  on  credit,  because  the  product  of  their  labor  has 
not  been  directly,  or  by  the  medium  of  money,  exchanged 
for  these  things  they  consume,  and  cannot  be  erxchanged  for 
them.  It  is  not  because  the  money  paid  to  them  as  wages 
and  price  of  raw  material  was  borrowed,  that  they  have  thus 
purchased  on  credit,  but  because  they  have  produced  faster 
than  other  producers  could  exchange  with  them  ;  it  is  pro- 
duction on  credit  in  excess  of  consumption.    The  actual 


CAPITAL,  LABOR,  AND  WAGES. 


299 


facts  masked  behind  bank  loans,  price  of  raw  material,  wages, 
and  purchases  of  necessaries,  are  then,  that  sellers  of  raw 
material,  laborers,  and  employers  produce  what  will  not  sell, 
and  are  supported  while  doing  so  by  the  credit  of  the  em- 
ployers. This  credit  is  guarantied  by  the  overstock  and  re- 
serve capital,  and  behind  these  fixed  capital  in  the  shape  of 
plant ;  and  behind  all  these  the  banker.  This  guaranty  is 
made  good  by  the  pledgers  in  the  order  named.  No  loans  of 
this  sort  can  be  made  upon  the  guaranty  of  productive  land 
devoted  to  the  production  of  the  necessaries  of  life.  Loans 
secured  by  such  capital  are  paid  out  of  the  income  of  the  land, 
and,  failing  that,  out  of  the  land  itself.  This  makes  the  lender 
quasi-owner  of  a  portion  of  the  land  until  his  debt  is  paid. 

THE  TRUE  REMEDY  FOR  THE  GRIEVANCES  OF  LABOR. 

It  follows  from  the  foregoing  demonstration  with  a  cer- 
tainty almost  equaling  that  of  mathematical  analysis,  that 
as  the  circulation  of  commodities  takes  place  to  effect  the 
consumption  of  commodities,  and  the  use  of  money  is  but  the 
use  of  a  conventional  process  through  the  use  of  a  conven- 
tional commodity,  not  intended  for  consumption,  to  circulate 
indirectly  real  commodities  intended  for  consumption,  and 
supply  the  void  created  by  consumption,  by  paying  all  labor 
required  for  that  purpose,^  the  circulation  of  money  for  com- 
modities, can  be  no  more  rapid  than  the  circulation  of  com- 
modities for  consumption.  To  talk  of  an  increased  rapidity 
of  the  circulation  of  money,  therefore,  is,  if  we  take  away  the 
mask  which  conceals  the  process,  to  talk  of  an  increased  ra- 
pidity of  the  circulation  of  commodities,  and  therefore  an 
increased  rapidity  of  consumption  by  the  same  set  of  con- 
sumers, which  is  absurd.  When  Mill  and  other  writers, 
therefore,  and  bankers,  write  or  talk  of  an  increased  rapidity 
of  the  circulation  of  money  as  the  means  of  economizing  the 
quantity  of  money  required,  they  write  or  talk  of  what  is 
absurd  and  impossible.  What  they  really  mean  is  the  rapid 
movement  of  money  into  and  out  of  banking  reserve,  when 
the  current  is  taking,  all  the  time,  a  little  more  money  out 
than  it  is  carrying  in.    This  my  analysis  has  demonstrated 


300 


POLITICAL  ECONOMY. 


to  be  an  increase  in  regular  progression  of  the  circulation  or 
use  of  the  conventional  commodity  or  units  of  value,  pur- 
chase, and  payment,  in  the  reserve,  called  money,  in  excess  of 
the  exchange  of  commodities  for  consumption,  and  the  pro- 
duction which  is  required  to  fill  the  void  thus  created.  There 
is  no  increase  of  the  rapidity  of  the  circulation  requisite  to 
carry  on  the  last  named  process,  which  process  is,  in  other 
words,  comuierce  itself,  but  there  is  an  extra  and  additional 
circulation  to  pay  for  labor  and  raw  material  created  by 
loans  (which  writers  and  bankers  have  never  perceived),  the 
effect  of  which  is  to  produce  in  some  quarters  more  than 
sufficient.  This  looks  like  increased  rapidity  of  circulation, 
sometimes  called  increased  economy  of  money,  but  is  in  fact 
nothing  of  the  kind.  The  true  remedy  for  labor  then  is,  not 
to  create  an  overstock ;  and  to  this  end  not  to  continue  to 
receive  wages  for  all  hands,  but  to  take  away  a  part  of  its 
laboring  forces  from  this  part  of  the  field.  It  is  equally  the 
duty  of  employers,  when  they  find  they  are  beginning  to  be 
overstocked,  to  send  away  a  part  of  their  laborers  and  buy 
less  raw  material ;  but  this  I  have  shown  to  be  morally  im- 
possible in  the  face  of  apparently  rising  prices.  But  is  it 
possible  to  overproduce  in  any  quarter  upon  the  average  ?  I 
have  shown  that  it  is  not.  Taking  into  consideration  excess 
and  its  natural  sequence  defect,  there  is  no  overproduction  ; 
taking  into  consideration  high  prices  and  low  prices,  there  are 
neither  high  nor  low  but  average  prices  ;  taking  into  account 
high  reserve  and  low  reserve,  there  is  average  reserve ;  and 
looking  at  excessive  expansion  of  circulation  of  money  be- 
yond the  circulation  of  commodities  for  consumption,  and 
the  lowest  degree  of  expansion,  there  is  moderate  expansion. 

We  do  not,  because  we  cannot,  produce  an  excess  upon 
the  average.  Iron  is  the  great  commodity  of  civihzation ,  , 
cloth  is  indispensable  ;  and  a  fcAV  years  suffice  to  dispose  of 
an  overstock  of  these.  It  is  not  an  oversupply  of  these 
merely  that  labor  has  produced.  Labor  as  well  as  capital 
has  been  urgently  invited  to  remove  to  large  cities  and  towns, 
and  the  former  has  received  enormous  wages,  paid  by  the 
latter  with  money  borrowed  at  enormous  rates,  to  "  improve  " 


CAPITAL,  LABOE,  AND  WAGES. 


301 


towns  and  cities  away  from  the  country  naturally  tributary 
to  them,  while  the  latter  has  been  invited  to  lay  out  its 
means  on  houses  and  warehouses,  which  embody  an  excess 
of  production  immeasurably  more  wasteful  and  unprofitable 
than  the  excess  embodied  in  iron  or  cloth.  The  problem  for 
labor  then  is,  not  to  work  less  on  the  average,  but  to  work 
as  much  or  even  more  on  the  average,  by  never  working  to 
excess  at  any  time,  and  therefore  too  little,  at  another  time. 
This,  I  have  already  shown,  can  come  only  from  producing 
just  as  fast,  or  at  least  but  little  faster,  than  producing  con- 
sumers are  willing,  simply  because  they  have  the  power  to 
exchange  for  and  consume ;  and  this  kind  of  producing, 
while  money  is  absolutely  essential  as  a  substitute  commod- 
ity, —  in  the  shape  of  coin  altogether,  without  banks  ;  coin 
with  banks  of  discount  and  deposit ;  coin  with  banks  of  issue 
only,  as  in  Adam  Smith's  time  ;  or  coin  with  banks  of  issue 
discount  and  deposit,  as  in  England  and  the  United  States, 
at  this  time,  —  can  be  maintained  only  by  stopping  the  cir- 
culation or  use  of  this  substitute  beyond  the  point  already 
designated.  A  metallic  circulation  without  banks  prevents, 
as  with  a  metallic  barrier,  the  use  of  the  substitute  commod- 
ity in  excess  of  the  real  commodity,  and  maintains  in  the 
hands  of  all  money  holders  including  capitalists,  who  lend, 
an  even  average  reserve.  Banks  with  a  metallic  reserve, 
kept  at  an  even  ratio  to  liabilities,  could  not  allow  produc- 
tion to  progress  far  beyond  this  point,  because  there  would 
be  a  fixed  point,  furnished  by  this  fixed  ratio,  beyond  which 
loans  could  not  go.  An  ordinary  banking  reserve  not  thus 
fixed  progressively  diminishes  when  production  is  advancing 
beyond  consumption,  because  the  money  in  it  obtains  through 
loans  a  progressively  increasing  circulation  in  excess  of  the 
actual  exchanges  going  on  between  producing  consumers, 
and  progressively  increases  when  production  progressively 
diminishes  below  those  exchanges.  When  production  dimin- 
ishes, and  the  overstock  is  being  reduced,  banking  reserve 
necessarily  and  unavoidably  increases  progressively  as  the 
overstock  diminishes. 

The  question  of  tariff  is  important  to  labor,  but  vastly 


302 


POLITICAL  ECONOMY. 


less  important  than  a  duly  regulated  currency,  because  with 
such  a  currency  tariffs  will  fall  practically  for  the  most  part 
upon  articles  best  able  to  yield  revenue.  A  regulated  cur- 
rency in  the  United  States  will  never  come  until  those  ex- 
tremely complex  elements  which  I  have  pointed  out  by 
analysis  are  fully  comprehended  and  acted  on.  The  reason 
why  France  has  so  sound  a  currency  is  because  she  uses 
mostly  metallic  money  and  a  few  sound  bank-notes,  without 
banks  of  discount  and  deposit.  Such  a  currency  takes  care 
of  itself,  and  requires  no  wit  of  man  to  regulate  it.  Its  cir- 
culation is  not  in  excess  of  the  circulation  of  commodities 
and  the  production  necessary  to  fill  the  void  created  by  con- 
sumption. Hence  its  productive  powers  are  well  balanced, 
and  there  is  no  waste  of  energy  and  force.  In  like  manner, 
a  metallic  currency  supplemented  by  twenty-five  or  even 
fifty  per  cent,  of  convertible  government  notes  as  well  as  a 
currency  of  bank-notes,  like  that  in  Adam  Smith's  time, 
without  banks  of  deposit  and  discount,  would  give  a  safe  and 
sound  currency,  because  the  notes,  in  the  first  case,  take  the 
place  of  so  much  metal ;  and  in  the  second,  the  banking 
reserve  for  redemption  of  notes  maintains  an  average  for 
short  periods.  The  real  meaning  of  the  latter  expression  is, 
that  with  slight  variations,  production  is  maintained  at  its 
proper  average.  But  banks  of  discount  and  deposit  cause 
an  entirely  artificial  and  additional  circulation  of  money,  as 
already  shown.  The  reserve  will  not  maintain  itself  at  aver- 
age within  short,  but  only  within  long,  periods ;  and  those 
periods  are  the  ascending  scale  of  loans  which  lead  to  a  crisis, 
and  the  descending  scale  which  leads  from  it.  The  wit  of 
man  is  therefore  requisite  to  discover  the  cause  and  furnish  a 
remedy.  An  artificial  maintenance  of  reserve,  as  already 
shown,  is  the  remedy.  In  this  remedy  labor  has  as  great  an 
interest  as  capital.  Unfortunately,  Great  Britain,  with  whom 
is  our  principal  trade,  has  the  same  banking  system  as  ours 
in  substance ;  the  difference  is  but  nominal.  The  Bank  of 
England  suspends,  apparently,  in  order  to  loan  the  public 
more  bank-notes  than  it  otherwise  could  do  but  never  is 


CAPITAL,  LABOE,  AND  WAGES. 


803 


called  upon  to  do  :  the  banks  in  the  United  States  suspend, 
apparently,  to  do  the  same  thing  substantially,  and  from  in- 
ability to  meet  calls  for  metal ;  convertibility  of  the  bank- 
notes is  the  only  difference  remaining  afterwards  on  the 
British  side.  This  difference  is  merely  nominal,  because 
contraction  results  in  both  cases.  In  either  country  no  ex- 
pansion of  note  circulation,  and  no  expansion  of  loans  after  a 
crisis,  takes  place,  but  quite  the  contrary ;  because  a  real  con- 
traction of  production  occurs,  which  is  paramount  to  all  other 
forces  at  work,  and  causes  a  contraction  of  all  circulation. 
If  the  currency  of  Great  Britain  were  like  that  of  France, 
the  well  regulated  production  of  iron  and  cloth  there  would 
have  enabled  Great  Britain  to  have  undersold  us  altogether 
in  our  own  markets,  and  would  have  partially  counteracted 
the  excess  of  production  in  the  United  States,  because  the 
latter  would  have  been  forced  out  of  the  field  to  a  great  ex- 
tent, while  in  Great  Britain  no  overproduction  could  have 
occurred  under  such  a  system  of  currency.  On  the  other 
hand,  had  the  United  States  maintained  a  currency  like  that 
of  France,  Great  Britain  maintaining  her  present  one,  there 
would  have  been  no  overproduction  and  therefore  no  crisis  in 
the  United  States,  and  the  latter  would  have  been  master 
of  the  field,  producing  at  home  a  better  quality  of  iron  and 
all  the  cloth  of  qualities  which  our  workmen  have  been  hith- 
erto able  to  make,  sufiBcient  to  meet  the  wants  of  consum- 
ers, at  prices  excluding  the  foreign  articles.  Independently, 
however,  of  all  protected  production,  and  regarding  only 
those  articles  which  one  nation  produces  to  the  exclusion 
of  another,  and  which  are,  therefore,  by  exchanges  the  chief 
sources  of  wealth  through  international  commerce,  the  effects 
of  high  prices  resulting  from  overproduction  are,  to  a.  great 
extent,  masked  in  the  currencies  of  the  countries  taking  the 
high  priced  articles  in  exchange.  If  high  priced  cloth  pro- 
duced in  the  United  States  is  sent  to  a  South  American  port, 
it  is  valued  in  the  currency  of  the  latter,  and  the  currency  of 
the  latter  is  received  for  it,  but  immediately  invested  in  prod- 
uce to  make  up  a  return  cargo.    Inequalities  of  money  price, 


% 


304 


POLITICAL  ECONOMY. 


in  different  articles,  are  thus  mutually  compensated,  and 
consequently  masked. 

The  true  remedy  of  labor,  therefore,  is  to  study  this  com- 
plex question  of  production  and  currency,  and,  having  mas- 
tered it, —  if  it  be  able  to  master  it, — to  unite  its  forces  with 
those  of  capital  to  obtain  a  currency  approximately  as  sound 
as  that  of  France. 

If,  in  reply  to  all  this,  labor  objects  that  the  matter  is  too 
vast,  too  complex,  and  too  abstract  for  any  practical  line  of 
action  on  its  part,  and  that  some  definite  plan  must  be  sug- 
gested if  any  definite  result  be  expected,  I  answer  that  there 
is  a  general  or  abstract  view  of  the  matter  which  is  essential 
to  establish  true  social  science  ;  and  there  is  also  a  very  prac- 
tical view  for  every-day  life.  I  have  examined  the  subject 
from  both  points  of  view,  going  from  the  least  to  the  most 
complex,  and  back  again.  It  is  impossible  to  lay  down  any 
practical  rules  to  advantage,  unless  their  importance  can  be 
demonstrated  as  matter  of  science ;  general  causes,  moreover, 
must  not  be  put  for  effects,  nor  effects  for  general  causes : 
objective  must  not  be  put  in  the  place  of  subjective  realities, 
nor  the  latter  in  place  of  the  former.  Thus  the  Ricardian 
theory  of  rent  will  answer  well  enough  as  a  mere  theory. 
Practically  it  may  be  considered  as  of  little  importance.  It 
is  important  only  as  indicating  that  on  this  subject  of  rent 
effect  is  put  by  Ricardo  and  his  followers  in  the  place  of 
cause  ;  and  hence  it  is  not  surprising  that  other  parts  of  the 
science  show  the  same  errors.  Rent  of  the  poorer  lands  is 
no  measure  of  the  rent  of  the  richer,  but  lands  are  valued 
according  to  their  relative  productiveness  and  the  price  of 
the  produce.  In  the  United  States  the  price  is  determined 
by  many  causes,  the  chief  of  which  is  the  relative  distance  of 
the  surplus  produce  from  its  final  destination  in  a  consumer's 
market,  and  the  relative  facility  of  reaching  it ;  while,  on 
the  other  hand,  all  markets,  the  ability  to  withhold  for  a 
time  from  every  market,  the  actual  withholding  from  mar- 
ket, relative  scarcity  and  relative  abundance,  are  minor  opera- 
tive causes.  The  price  on  the  average  is  steady,  while  it 
varies  much  within  short  periods.    The  surplus  not  con- 


CAPITAL,  LABOR,  AND  WAGES. 


305 


sumed  by  producers  can  be  exchanged  for  necessaries  of 
another  kind ;  and  if  no  more  of  the  latter  is  produced  than 
sufl&cient  to  exchange  for  the  surpkis,  the  steadiness  of  the 
former  will  extend  to  the  latter.  The  rent  of  the  richer 
lands  must  rise  in  value  first,  in  order  to  force  the  cultiva- 
tion of  the  poorer.  The  cultivation  and  the  rent  of  the 
latter  result  from  the  cultivation  of  the  former.  As  but 
little  land  is  rented  in  the  United  States,  we  may  substitute 
for  the  most  part  interest  for  rent,  or  regard  only  relative 
income.  The  science  of  production  and  exchange  is  not 
founded  upon  any  such  fanciful  principles  as  the  Ricardian 
theory  of  rent,  which  puts  one  of  the  last  developments  of  a 
complex  process  for  a  primary  one. 

If  this  may  be  said  of  rent,  still  more  may  it  be  said  of  a 
branch  of  the  science  more  complex,  —  and  in  fact  the  most 
complex  of  all,  —  that  of  money.  It  is  perhaps  impossible  to 
eradicate  the  idea  that  ordinary  credit  is  the  only  element  at 
work  in  some  way  or  other  to  produce  commercial,  banking, 
and  industrial  crises.  Labor  perceives  very  plainly  that  when 
banks  loan,  and  manufacturers  borrow  freely,  wages  are  high. 
Hence  the  inference  that  abundance  of  money  in  the  shape 
of  government  issues  would  give  abundance  of  work.  But 
the  premises  are  false.  It  is  not  ordinary  credit  that  is  at 
work,  either  in  England  or  the  United  States.  Suppose  a 
bank  should  be  started  in  France  with  a  capital  of  one  thou- 
sand million  francs,  without  the  power  of  lending  a  dollar  or 
issuing  a  note,  but  governed  by  a  committee  of  the  deposit- 
ors, the  cashier  and  other,  ofl&cers  being  required  to  safely 
keep  the  deposits,  after  paying  all  checks  in  gold  and  silver 
or  bank-notes  :  probably  thirty-three  per  cent,  of  the  gold 
and  silver  would  be  sufficient  to  meet  calls,  and  the  remainder 
could  be  locked  up  and  not  seen  from  one  year's  end  to  an- 
other. There  would  be  precisely  the  same  amount  of  money 
to  loan  after  the  bank  started  in  business  as  before  it  was 
ever  thought  of,  and  no  more ;  because  there  are  no  loans 
made  by  the  banks,  but  only  by  individuals,  and  they  have 
no  more  to  loan  than  before.  It  is  only  a  convenient  mode 
of  keeping  and  paying  and  receiving  the  metal  and  paper. 

20 


306 


POLITICAL  ECONOMY. 


But  let  the  managers  of  the  bank  undertake  to  open  the 
box  containing  the  surplus  six  hundred  and  sixty-seven  mil- 
lions, which  have  not  seen  the  light  for  a  long  time  perhaps, 
and  loan  it,  and  they  will  be  giving  a  circulation  to  six  hun- 
dred and  sixty-seven  millions  in  excess  of  all  the  money  cir- 
culation necessary  to  circulate  all  the  commodities  required 
for  consumption,  and  all  the  production  necessary  to  take 
the  place  of  the  commodities  consumed  by  the  instrumental- 
ity of  the  one  thousand  millions  of  francs.  The  holder  of 
money  is  a  producer  when  he  sells  products  and  receives  the 
money,  or  when  somebody  else  sells  and  receives  for  him  ; 
when  he  parts  with  his  money  and  buys  products  for  his 
own  use  he  is  so  far  a  consumer. 

All  the  surplus  money  which  he  retains  without  loaning 
is  without  effect  on  production.  If  he  loans  it  all  he  only 
loans  an  amount  precisely  equal  to  that  amount  of  commodi- 
ties the  consumption  of  which  is  proved  to  have  taken  place 
by  the  payment  of  the  money  to  him ;  and  when  he  is  lend- 
ing another  is  receiving.  But  any  amount  of  money  circu- 
lated in  excess  of  this  is  in  excess  of  all  the  consumption  that 
has  taken  place,  and  is  therefore  circulated  to  pay  for  un- 
productive consumption,  —  or,  what  has  the  same  immediate 
effect,  productive  consumption  without  a  market  to  exchange 
the  produce.  That  the  owners  of  the  one  thousand  millions 
deposited  will  make  all  loans  sufficient  to  supply  the  void 
created  by  consumption  is  absolutely  certain,  because  there 
will  be  a  constant  demand  to  that  extent  under  all  circum- 
stances. Therefore,  to  loan  the  six  hundred  and  sixty-seven 
millions,  and  keep  it  constantly  in  loan,  is  to  cause  production 
to  advance  beyond  consumption  to  the  amount  of  six  hun- 
dred and  sixty-seven  millions  ;  the  bank  will  never  have  but 
three  hundred  and  thirty-three  millions  to  meet  the  calls  aris- 
ing from  one  thousand  millions  of  deposits,  and  it  will  need 
no  more ;  and  if  the  bank  is  indefinitely  continued,  it  will 
have  three  hundred  and  thirty-three  millions  of  metal  and 
six  hundred  and  sixty-seven  millions  of  bills  receivable  to 
show  for  the  original  one  thousand  millions  of  metal.  Intro- 
duce this  banking  throughout  France  and  one  half  the  metal 


CAPITAL,  LABOR,  AND  WAGES. 


307 


now  there  will  leave  France,  and  there  will  be  sixty-seven 
per  cent,  more  money  on  loan  than  there  was  before.  Intro- 
duce savings  banks  and  they  will  add,  as  auxiliaries  to  the 
total  of  loans,  thirty-three  per  cent,  more :  individual  loans 
will  also  increase.  This  change  would  produce  a  crisis  ;  but 
finally,  because  this  increase  in  the  total  of  loans,  being  the 
cause  of  precisely  so  much  production  upon  credit  in  advance 
of  consumption,  would  be  stopped  at  a  definite  point,  being 
thirty-three  per  cent,  above  absolute  exhaustion  of  reserve, 
production  and  commerce  would  go  on  in  subordination  to 
the  new  system.  It  is  the  introduction  undoubtedly  of  a 
new  system  of  production  —  production  on  credit  largel}^  in 
advance  of  a  market,  but  presenting  a  fixed  point  at  the 
same  time  beyond  which  such  production  cannot  proceed. 
Prices,  production,  and  commerce  are  steady  at  that  point, 
while  loans  are  doubled,  and  the  total  of  metal  in  France  is 
reduced  one  half.  This  was  precisely  the  economy  of  metal 
effected  in  Scotland  with  banks  of  issue  only,  in  Adam  Smith's 
time.  The  redeposit  of  the  six  hundred  and  sixty-seven  mil- 
lions in  the  first  bank  would  undoubtedly  increase  the  total  of 
deposits  to  one  thousand  six  hundred  and  sixty-seven  mil- 
lions ;  but  all  this  redeposit  would  not  occur.  A  part  of  the 
six  hundred  and  sixty-seven  millions  would  be  redeposited, 
but  most  of  it  would  retire  from  circulation  and  out  of  France ; 
and  the  final  result  would  be,  that  the  old  total  of  loans 
would  be  nearly  doubled,  and  at  the  same  time  the  total  of 
coin  to  sustain  all  the  loans  would  be  only  one  third  of  the 
former  volume  ;  so  that  beside  doubling  the  loans  there 
would  be  what  is  called  an  economy  of  fifty  per  cent,  in  metal. 
But  this  supposed  economy  is  a  fallacy.  There  can  be  no 
economy  of  metal  except  in  doing  precisely  what  was  done 
before  with  a  certain  quantity  of  metal  with  a  smaller  quan- 
tity of  metal.  This  alone  is  economy  of  metal.  If  the  United 
States  maintain  henceforth,  after  resumption,  one  hundred 
and  fifty  millions  of  convertible  treasury  notes,  it  will  be  an 
economy  of  metal  to  the  United  States,  with  an  equivalent 
expansion  to  the  commercial  world  of  one  hundred  and  fifty 
millions.    The  well-managed  banks  of  issue  in  Adam  Smith's 


308 


POLITICAL  ECONOMY. 


time  economized  one  million  pounds  of  metal  for  Scotland 
by  taking  the  place  of  and  sending  abroad  one  of  the  two 
millions  of  metal  which  had  circulated  in  Scotland  before 
bank-notes  were  issued ;  but  at  the  same  time  virtually- 
expanded  the  metallic  circulation  of  the  commercial  world 
while  economizing  to  that  amount  for  Scotland.  The  econ- 
omy, therefore,  as  a  whole,  scientifically  viewed,  is  imagin- 
ary. But  let  it  be  called,  in  obedience  to  popular  ideas, 
economy,  the  term  is  still  totally  inapplicable  to  bank  re- 
serve. In  the  two  cases  of  the  United  States  and  Scotland 
just  referred  to,  there  is  no  expansion  of  production  on  credit 
by  the  notes,  as  there  is  with  deposit  and  discount  banking. 
Instead  of  the  same  total  of  loans  continuing  to  be  made,  as 
in  the  United  States  and  Scotland,  supposing  deposit  and  dis- 
count banks  aside  in  both  cases,  and  allowing  only  for  the 
increased  expansion  of  the  commercial  world's  total  by  the 
issue  of  one  hundred  and  fifty  millions  of  treasury  notes  by 
the  United  States,  and  one  million  pounds  of  bank-notes  by 
the  Scotch  banks,  the  result  in  France,  on  the  other  hand,  in 
the  case  supposed,  of  establishing  banks,  is  something  totally 
different  from  mere  economy  of  metal.  While  one  third  of 
the  coin  makes  all  the  loans  the  whole  of  the  coin  deposited 
did  before,  it  is  also  enabled,  by  extra  circulation  out  of  a  con- 
solidated fund,  to  keep  in  loan  and  in  addition  as  much  more 
money.  But  although  these  new  loans  are  the  sole  cause  of 
production  on  credit  largely  in  excess  of  consumption ;  being 
also  at  the  same  time  stopped  everywhere  at  the  same  point, 
production  is  kept  steadily  at  that  point,  and  after  a  time 
there  is  no  danger  of  crisis.  But  introduce  now  the  fashion 
of  allowing  every  bank  to  keep  such  reserve  as  it  chooses 
(which  means,  looking  behind  the  mask  of  money,  to  allow 
production  on  credit  to  proceed  as  far  as  it  will),  and  the  in- 
evitable result  is  a  series  of  cycles  in  production  like  those 
we  see  in  Great  Britain  and  the  United  States.  Now  the 
opinion  of  Mill,  of  Price,  and  others,  among  British,  and  of 
Perry,  Walker,  and  others,  in  the  United  States,  is,  that 
what  banks  lend  is  a  credit  currency,  and  Price  declares  it  is 
like  mercantile  credit.    In  some  particulars  Price  is  right. 


CAPITAL,  LABOK,  AND  WAGES. 


309 


If  a  bank  owes  depositors  a  million  of  pounds,  will  it  not  pay 
the  whole  or  a  part  of  that  debt  as  one  merchant  would  pay 
another  ?  Will  it  not  pay  by  a  set-off  of  credits,  or  by  bal- 
ancing debt  against  credit  ?  Doubtless  this  would  be  one  of 
the  results ;  and  not  only  to  these  writers,  but  to  everybody 
else,  it  is  the  only  apparent  result.  *  But  whether  it  is  the 
only  result,  or  merely  one  among  several  results,  depends 
entirely  upon  whether  the  payment  is  real  or  only  apparent ; 
whether  it  actually  pays,  or  only  shifts  the  debt  to  other 
shoulders.  When  the  six  hundred  and  sixty-seven  millions 
of  francs  in  gold  and  silver  were  loaned,  they  caused  produc- 
tion on  credit  to  that  amount  to  take  place.  A  sale  to  con- 
sumers who  had  something  to  give  in  exchange  for  the  six 
hundred  and  sixty-seven  millions  of  new  products  would 
cause  a  real  payment  of  the  six  hundred  and  sixty-seven  mil- 
lions back  to  the  bank  to  take  place ;  but  if  no  such  sale 
took  place,  the  bank  could  retire  from  business  by  causing 
its  bills  receivable  to  be  discounted  by  a  new  bank  of  one 
thousand  millions,  having  just  received  that  amount  on 
deposit.  In  this  way  the  six  hundred  and  sixty-seven  mil- 
lions, as  well  as  the  reserve  of  three  hundred  and  thirty-three 
millions,  could  be  restored  to  depositors,  and  the  first  bank 
wound  up  ;  or  the  depositors  might  deposit  their  checks  in 
the  new  bank  instead  of  receiving  payment  in  coin.^  The 
result  would  be  precisely  the  same  in  either  case,  because 
production  on  credit  would  stand  precisely  where  it  stood 
before,  —  at  six  hundred  and  sixty-seven  millions,  —  and 
the  whole  effeet  would  be  merely  to  change  the  persons 
of  debtors  and  creditors.  Where  production  on  credit  has 
taken  place,  therefore,  what  looks  like  real  commerce  is  the 
total  of  clearings.    But  real  commerce  is  the  exchange  of 

1  Deposit  and  discount  banking  could  only  be  introduced  in  France  by 
deposit  of  metal  and  bank-notes,  and  a  loan  of  these  down  to  a  point  where  the 
remaining  metal  and  notes  would  be  called  reserve.  The  volume  of  loans 
would  be  what  is  called  by  Price  and  others  bank  debt.  All  further  loans 
would  diminish  still  more,  as  all  payments  would  increase,  the  reserve  ;  and  so 
far  as  sales  were  not  for  consumption,  the  effect  would  be  merely  a  change  of 
bank  debtors.  But  it  would  be  a  mistake  to  suppose  that  such  banks  were 
dealers  in  their  own  debt. 


810 


POLITICAL  ECONOMY. 


products  between  or  towards  actual  consumers.  The  rapid 
increase  in  volume  of  loans  from  day  to  day,  month  to 
month,  and  year  to  year,  therefore,  is  only  in  respect  to  that 
increase  the  creation  of  additional  debt  by  loans,  and  shifting 
to  new  shoulders  of  the  already  existing  debt  due  banks  for 
production  on  credit,  with  profits  of  producers  added.  This 
makes  some  changes  in  depositors,  and  very  great  and  con- 
tinual changes  in  borrowers,  and  in  debts  due  banks  from 
each  other.  It  is  apparently  a  matter  of  debt  and  credit ; 
and  not  only  apparently  but  in  the  result  really  such,  so  far 
as  the  debt  created  by  overstock  is  shifted  from  one  set  of 
shoulders  to  another,  and  from  one  bank  to  another.  But 
all  the  loans  which  caused  that  production  on  credit  to  take 
place  in  the  case  supposed  in  France  were  made  in  gold  and 
silver  out  of  the  reserve,  and  so  were  all  such  loans  in  Eng- 
land and  the  United  States,  except  so  far  as  bank-notes  sup- 
plemented the  want  of  metal.  So  far  as  real  commerce 
takes  place,  therefore,  the  reserve  is  brought  up  ;  so  far  as 
production  on  credit  expands,  it  is  reduced ;  and  so  far  as 
the  debt  due  banks  by  the  original  producers  on  this  credit 
is  shifted  to  other  (mercantile)  shoulders,  and  indefinitely 
to  other  shoulders  by  the  latter,  the  reserve  remains  unaf- 
fected. In  the  United  States  and  Great  Britain  it  is  claimed 
by  most  writers  and  bankers  that  the  reserve  ought  to  vary, 
and  must  vary.  It  has  been  proposed,  however,  in  some  in- 
stances, to  require  banks  of  issue  to  keep  a  certain  reserve, 
and  it  may  in  some  one,  or  possibly  more,  instances  have 
been  proposed  for  banks  of  deposit  and  discount,  but  only 
by  way  of  indefinite  precaution,  and  never  as  a  matter  of 
science.  The  average  reserve  in  Scotland  in  Smith's  time 
maintained  itself  at  twenty-five  per  cent. ;  in  the  United 
States  it  has  been  constantly  varying,  but  has  averaged 
probably  from  eighteen  to  twenty  per  cent.  ;  it  is  impossible 
to  say  what  it  has  been  in  Great  Britain,  for  want  of  reports. 
Therefore,  what  is  needed  in  the  United  States  is  a  metallic 
reserve  of  twenty  per  cent.,  and  it  would  perhaps  be  well 
ultimately  to  increase  it  by  progressive  stages  to  twenty-five 
per  cent.    This  would  bring  production  on  credit  to  a  well 


CAPITAL,  LABOR,  AND  WAGES. 


311 


defined  volume,  and  thereby  insure  labor  steady  employment 
and  steady  wages.  Should  it  turn  out  that  too  many  have 
left  the  plow,  some  must  return  to  the  plow.  The  grand 
total  of  production  will  be  thus  increased,  and  harmony  of 
production  promoted.  But  if  labor  continues  to  overcrowd 
certain  fields,  as  it  surely  will ;  if  production  on  credit  is  not 
limited,  and  is  forced  into  bankruptcy  with  capital,  through 
inability  to  sell  what  it  offers  for  sale,  what  right  has  it  to 
complain  more  than  capital  ?  The  example  of  France  is 
appealed  to.  I  have  shown  by  rigorous  analysis  why  and 
wherein  it  ought  to  be  appealed  to. 

Let  labor  study  this  question  of  production  on  credit  and  ex- 
cess of  loans,  which  is  its  cause,  and  seek  with  capital  the  true 
remedy.  That  remedy  is  practically  concealed  from  the  sci- 
ence of  production  and  exchange  so  long  as  it  puts  effect  for 
cause.  The  Ricardian  theory  of  rent  is  practically  unimpor- 
tant, but  the  theory  that  a  bank  deals  only  in  ordinary  debt 
and  credit  has  been  productive  of  vast  mischief,  because  it 
has  retarded  the  investigation  of  the  very  difficult  and  complex 
phenomena  and  processes  which  underlie  banking.  Because 
bank  loans  represent  an  equal  volume  of  production  on  credit, 
caused  by  an  equal  volume  of  loans  out  of  banking  reserve, 
the  consumption  of  the  whole  product  would  restore  the  re- 
serve to  the  total  of  deposits,  and  loans  would  be  fully  paid. 
To  force  consumption  to  a  definite  ratio  with  production  on 
credit  is  the  object  I  propose  in  a  fixed  ratio  of  reserve. 
But  labor  may  still  insist,  after  all  that  has  been  said,  that  it 
is  impossible  to  make  it  clear,  or  even  to  succeed  in  forcing 
an  admission  from  bankers  and  writers,  producers  and  capi- 
talists, that  a  banking  reserve  of  a  definite  ratio  has  any 
necessary  connection  with  production  and  exchange  ;  and 
how  then  can  it  be  expected  that  men  of  labor  can  see  any 
better,  and  if  they  do,  in  enforcing  the  views  of  labor  on 
capital  ?  True,  indeed,  the  subject  is  exceedingly  complex  ; 
money  causes  complexity  enough  by  itself,  but  the  extra  cir- 
culation given  to  the  money  of  a  country  through  banks  so 
complicates  the  subject  of  production  and  exchange,  already 
complicated  enough,  that  it  is  almost  impossible  to  discover 


312 


POLITICAL  ECONOMY. 


what  is  the  real  process.  It  is  generally  supposed  that  the 
principal  thing  accomplished  by  banking  is  an  economy  of 
metal.  In  the  supposed  French  bank,  if  the  depositors  had 
shipped  abroad  and  sold  the  six  hundred  and  sixty-seven  mil- 
lions of  coin  for  government  debt,  the  metal  would  have  been 
distributed  throughout  the  commercial  world,  producing  the 
same  effect  as  if  that  additional  amount  had  been  mined, 
smelted,  refined,  assayed,  and  coined,  and  so  added  to  the 
total  coin  in  the  commercial  world.  It  would  not  have  been 
an  economy  of  metal,  internationally,  but  the  direct  reverse, 
because  it  would  have  added  to  the  total  of  the  commercial 
world's  metal  as  much  as  it  had  been  supposed  to  economize 
at  home.  But  in  common  parlance,  and  in  a  sense  elsewhere 
explained,  it  would  be  economy,  undoubtedly,  although  its  ul- 
timate effect  would  be  merely  to  increase  the  total  of  money, 
and  general  prices,  in  the  precise  ratio  of  the  six  hundred  and 
sixty-seven  millions  by  weight  of  mass  to  the  total  mass  of 
all  the  money  in  the  world,  producing  so  far  only  the  same 
effect  as  that  produced  in  modern  times  by  the  increased  pro- 
duction of  mines.  If  the  increased  production  of  metal  or  its 
equivalent  be  economy  of  metal,  then  the  shipping  abroad  of 
the  six  hundred  and  sixty-seven  millions,  and  exchanging  it 
for  merchandise  to  import  into  France,  and  thus  perpetually 
saving  to  France  the  annual  interest  of  six  hundred  and  sixty- 
seven  millions,  would  be  economy.  From  one  point  of  view, 
doubtless,  it  would  be  economy,  because  the  interest  thus  an- 
nually saved  to  France  would  be  more  than  her  annual  share 
of  loss  of  purchasing  power  in  the  total  of  money  finally 
resulting  from  the  increase  of  its  effective  total  by  making 
three  hundred  and  thirty-three  millions  perform  the  work  of 
one  thousand  millions,  and  up  to  a  certain  point  the  economy 
might  be  continued.  The  same  effect  would  have  resulted 
by  loaning  the  six  hundred  and  sixty-seven  millions  in  France 
and  keeping  it  loaned,  —  one  set  of  loans  succeeding  to  and 
taking  the  place  of  another,  —  and  thus  allowing  the  six  hun- 
dred and  sixty-seven  millions  to  be  gradually,  instead  of  im- 
mediately, distributed  throughout  the  commercial  world.  But 
in  the  latter  case,  we  have  exactly  the  American  and  English 


CAPITAL,  LABOR,  AND  WAGES. 


313 


system ;  in  short,  we  have  deposit  and  discount  banking  per- 
manently established.  There  is  a  permanent  economy  of  six 
hundred  and  sixty-seven  millions,  a  saving  at  five  per  cent, 
of  three  millions  three  hundred  and  fifty  thousand  francs 
annually  in  interest,  and  an  annual  loss  on  the  other  hand  of 
perhaps  not  one  fifth  of  that  sum,  through  loss  of  purchasing 
power  of  the  remaining  metal  in  the  commercial  world  by 
the  general  expansion,  caused  by  the  expansion  of  the  com- 
mercial world's  total  of  money  by  six  hundred  and  sixty-seven 
millions.  All  this  is  comparatively  unimportant ;  the  mate- 
rial point  is,  that  production  on  credit  in  France,  heretofore, 
has  never  been  able  to  get  far  ahead  of  actual  commerce. 
While  one  was  lending  his  money,  another  was  receiving  it 
back  from  loan ;  there  was,  within  short  periods,  the  same 
amount  on  hand  for  loan  in  the  hands  of  lenders,  the  same 
amount  in  the  hands  of  borrowers,  and  the  same  amount  in 
the  hands  of  consumers,  because  production  was  proceeding  in 
harmony.  Introduce  the  banking  system  throughout  France, 
and  remove  all  restrictions  in  respect  to  banking  reserve,  and 
production  might  progress  in  an  ascending  scale,  and  go  back 
in  a  descending  scale  if  there  were  borrowers,  as  in  England 
and  the  United  States.  The  economy  of  metal  would  result 
in  an  expansion  of  production  on  credit,  a  series  of  bankrupt- 
cies, crises,  and  national  loss,  and  still  more  artificially  pro- 
duced inequalities  of  distribution  of  capital.  Bank-notes 
would  have  nothing  to  do  with  the  result,  but  an  increase 
artificially  of  loans,  mostly  of  metal.  Production  as  a  whole, 
and  upon  an  average  of  ten  years,  although  greatly  stimu- 
lated, would  be  too  much  stimulated,  and  the  result  would  be 
a  falling  off  at  last  in  production  to  restore  the  equilibrium. 
There  would  be  an  absolute  loss  of  productive  energy,  be- 
cause inharmoniously  applied,  and  hence  of  the  grand  total 
of  its  results  ;  the  total  wealth  —  in  other  words  the  total  pro- 
ductive capital  —  of  France  would  not  be  so  great  as  it  was 
before ;  its  total  income  would  be  less,  because  on  the  whole 
the  income  of  individuals  would  be  less.  It  is  impossible  to 
bankrupt  a  large  number  of  individuals,  both  laborers  and 
capitalists,  and  drive  them  away  from  the  industry  they  are 


314 


POLITICAL  ECONOMY. 


pursuing,  because  there  is  too  much  of  it  in  that  one  quarter, 
without  in  the  end  causing  loss  to  the  nation.  Say's  abstract 
doctrine  has  been  productive  of  loss  to  labor.  Finally,  if 
labor  is  not  convinced,  suppose  money  aside,  and  capitalists 
loaning  wheat,  provisions,  and  other  necessaries  to  manufact- 
urers, to  be  consumed  by  them,  by  their  laborers,  and  by 
the  sellers  of  raw  material ;  there  can  be  no  overstock,  be- 
cause loans  cannot  be  obtained  in  sufficient  amounts.  But 
suppose  banks  to  be  introduced,  even  now  there  can  be  no 
overstock  so  long  as  loans  are  confined  directly  to  wheat, 
provisions,  and  other  necessaries,  instead  of  being  indirectly 
loaned  to  enable  producers  to  procure  those  articles,  by 
means  of  money,  and  banks  which  loan  only  money.  But 
suppose  prices  of  the  overproduced  articles  to  rise,  instead  of 
falling  as  they  undoubtedly  would,  with  the  increase  of  loans 
of  the  articles  named  in  kind,  a  crisis  would  inevitably  fol- 
low, as  now  it  always  follows  with  banks  which  are  never 
regulated  in  their  loans  by  their  reserve.  The  same  kind  of 
remedy  would  then  be  demanded,  as  I  propose  now  for  banks 
dealing  only  in  money  —  a  fixed  ratio  of  reserve  in  the  shape 
of  wheat,  etc.,  to  liabilities.  The  presence  of  money  and  the 
shadow  of  loans  of  money  in  the  shape  of  bank  debt  pre- 
vent us  from  clearly  perceiving  the  commercial  connection 
between  bank  reserve  and  production  on  credit  in  advance 
of  consumption.  If  the  United  States  had  no  banks  of  dis- 
count and  deposit,  and  either  one  or  more  banks  of  issue 
under  national  control,  with  notes  absolutely  and  freely  con- 
vertible at  the  chief  commercial  centres ;  or  were  the  United 
States,  in  the  absence  of  all  banks,  to  supplement  gold  coin 
with  an  issue  of  one  hundred  and  fifty,  two  hundred,  or  even 
two  hundred  and  fifty  millions  of  treasury  notes  always  con- 
vertible, there  would  be  an  end  of  banking,  commercial,  and 
industrial  crises,  as  we  now  know  them.  Such  crises  would 
be  in  mitigated  form,  and  of  short  duration.  But  banks  are 
too  convenient  to  be  given  up,  if  it  is  possible  to  make  the 
mercantile  and  banking  world  perceive  what  banking  really 
is,  and  the  necessity  of  regulating  it  in  the  manner  proposed. 
Labor  has  even  a  greater  interest  than  capital  in  regulating 
bank  loans. 


CAPITAL,  LABOR,  AND  WAGES. 


315 


The  common  opinion  is  that  banks  of  deposit  and  discount 
are  entirely  harmless  in  a  "  speculative  "  point  of  view ;  that 
"  speculators  "  cannot  use  them  to  advantage  if  the  money 
in  circulation  be  gold  and  silver, — gold  with  free  coinage, 
and  silver  with  "  token  "  coinage,  or  sound  bank-notes.  If 
there  be  any  "  speculation  "  in  the  case,  it  comes  entirely, 
say  some  of  the  writers  who  use  these  utterly  unmeaning 
phrases,  from  bank-notes.  If  gold  and  silver,  however,  can 
be  put  in  circulation  through  bank  loans,  in  excess  of  actual 
commerce,  undoubtedly  the  same  result  can  be  and  is  accom- 
plished as  with  bank-notes  ;  and  the  full  meaning  of  this  is, 
as  I  have  shown  in  other  parts  of  this  work,  that  deposit  and 
discount  banking,  by  preventing  the  return  of  notes  for  re- 
demption out  of  the  commercial  world's  stock  of  coin,  ag- 
gravates all  the  difficulties  attending  a  circulation  of  perfectly 
convertible  as  well  as  imperfectly  convertible  notes.  It  is 
deposit  and  discount  banking,  and  not  bank-note  issues  con- 
sidered by  themselves,  which  causes  the  most  of  what  these 
writers  call  "  speculation."  It  is  a  popular  delusion  which 
attributes  the  speculation  "  to  bank-notes.  Until  this  de- 
lusion is  got  rid  of,  there  can  be  no  popular  advance  in 
the  science  of  money  as  a  branch  of  the  science  of  produc- 
tion and  exchange.  Should  the  United  States  succeed  in 
making  their  notes  convertible  in  1879,  and  in  maintaining 
convertibility,  and  should  the  banks  do  likewise  with  their 
notes  (to  illustrate  exactly  what  I  mean  by  the  expression 
"this  delusion  V),  suppose  all  bank-note  circulation  to  be  re- 
tired in  1882,  all  banks  of  issue  wound  up,  and  no  "  green- 
backs "  or  other  United  States  treasury  notes  in  existence; 
either  gold  of  free  coinage  and  silver  of  subsidiary  coinage, 
or  both  gold  and  silver,  or  silver  alone  of  free  coinage,  as 
the  United  States  may  not  in  the  first  case,  or  may  in  the 
second  case,  fully  remonetize  silver,  taking  the  place  of  all 
paper  in  the  circulation,  would  or  would  not  the  abolition 
of  all  paper  circulation  and  the  substitution  of  metal  in 
either  of  the  forms  mentioned  stop  "  speculation  "  and  pro- 
duction on  credit,  or  would  it  even  essentially  modify  it? 
It  would  not,  unless  all  the  demonstrations  in  this  work  are 


316 


POLITICAL  ECONOMY. 


founded  on  fallacies.  The  circulation  of  Great  Britain  is 
substantially  metallic  now,  and  has  been  since  1844 ;  and  yet 
she  is  as  subject  to  panics  and  crises  as  the  United  States. 
The  effect  of  substituting  metal  in  the  United  States  would 
be  merely  to  lessen  the  economy  of  metal  already  fully  ex- 
plained, and  it  would  be  no  more.  Metal  alone  would  be 
seen  in  circulation,  and  metal  alone  would  be  seen  in  bank- 
ing reserve,  but  the  records  of  production  on  credit,  as  shown 
on  bank-books,  for  which  all  the  national,  state,  and  private 
banks  in  the  United  States  now  stand  guarantors,  would 
continue  substantially  the  same,  being  in  form  transferred  to 
a  vast  number  of  private  banks.  Nothing  but  the  entire 
abolition  of  bank  loans  in  the  future,  and  the  very  gradual 
winding  up  of  these  banks,  would  bring  down  the  volume  of 
labor's  products  on  credit,  and  as  a  result  the  total  of  loans 
to  producers,  to  a  point  corresponding  to  that  maintained  in 
France.  As  consumption,  and  therefore  actual  commerce, 
gains  upon  production  on  credit,  the  volume  of  these  prod- 
ucts on  credit  grows  less,  and  demonstrates  the  fact  by  an 
increasing  banking  reserve,  both  in  Great  Britain  and  the 
United  States ;  it  makes  no  difference  that  in  the  latter 
country  the  reserve  is  in  greenbacks."  Trade  is  now 
(1877)  in  a  healthy  condition  in  Great  Britain  and  the 
United  States  ;  the  banking  reserves  of  both  countries  show 
what  has  been  accomplished  within  the  last  few  years  in 
getting  rid  of  old  stock  produced  on  credit,  and  now  would 
be  the  time  to  attempt  to  establish  a  proper  ratio  of  reserve 
to  liabilities  in  the  banks,  were  even  the  rudiments  of  bank- 
ing science  understood.  To  fix  that  ratio  at  a  proper  point, 
and  to  keep  it  there,  if  that  indeed  be  possible,  would  insure 
labor  that  all  its  future  wages  on  credit,  advanced  by  pro- 
ducers, would  be  immediately  refunded  in  a  consumers'  mar- 
ket, —  the  market  of  true  commerce,  —  and  banking  and 
industrial  crises  reduced  to  a  minimum. 


CHAPTER  XI. 

REGULATION  OF  RATES  OF  INTEREST  BY  LAW. 

Interest  has  no  relation  to  the  "volume  of  money," 
because  money  is  not  a  commodity,  and  the  mercantile 
theory  of  money  as  possessed  of  intrinsic  value,  and  being 
an  end  in  itself  instead  of  being  only  means  to  an  end,  has 
been  in  previous  chapters  and  in  various  modes  demon- 
strated to  be  false.  The  mercantile  theory  is  the  founda- 
tion of  the  ideas  of  scarcity  and  plenty  of  money,  as  dis- 
tinguished from  the  use  or  circulation  of  money,  as  an  agent 
in  the  production  and  distribution  of  commodities.  The 
"  demand  for  money  "  is  not  a  demand  for  a  commodity  like 
wheat,  but  a  demand  for  the  means  of  buying  labor,  labor 
and  raw  material,  finished  products  intended  for  consump- 
tion, which  may  be  called  quick  capital,  or  that  kind  of 
property  which  may  be  called  fixed  capital. 

As  already  shown  in  the  chapter  on  Interest,  Rent,  and 
Taxes,  and  elsewhere,  the  use  of  money,  by  putting  it  in 
circulation  through  the  instrumentality  of  banks,  in .  excess 
of  the  actual  distribution  of  commodities  for  consumption 
through  the  exchanges,  furnishes  to  the  loaning  banks  a 
credit  interest  in  the  shape  of  discount,  which,  when  care- 
fully examined  and  analyzed,  is  the  fixed  share  of  the  banks 
in  the  final  result  or  outcome  of  that  production  on  credit 
which  the  loans  enable  to  take  place.  The  banks  take  the 
risk  of  the  borrowing  producer's  being  able  to  refund  the 
money  loaned,  by  one  or  the  other  of  two  modes :  first,  by 
sales  of  the  product  resulting  from  the  loans,  to  a  merchant 
who,  by  the  aid  of  another  loan,  intervenes  as  a  distrib- 
utor or  one  of  several  distributors  between  the  first  borrow- 
ing producer  and  consumers ;  secondly,  if  the  loan  is  made 


318 


POLITICAL  ECONOMY. 


to  a  merchant,  that  he  will  be  able  to  sell  the  product  with 
all  intervening  charges  and  profits  sufficient  to  cover  profits, 
to  some  other  merchant,  who,  by  aid  of  another  loan,  comes 
in  time  to  enable  the  borrower  to  pay  the  money  back ; 
thirdly,  by  sales  of  the  product  to  a  merchant  who  has  the 
cash  in  his  hand  to  pay,  received  for  products  which  have 
been  actually  exchanged  for  consumption.  The  former  two 
cases  involve  much  greater  risks  of  capital  loaned  than  the 
third,  because  in  these  a  market  is  not  yet  found,  while  in 
the  third  it  has  been  found,  or  rather  is  readily  found.  In 
the  former  two  cases  the  risk  increases,  as  loans  of  that 
kind  increase,  through  the  instrumentality  of  all  the  banks 
in  the  country :  the  more  loans  made  either  to  cause  pro- 
duction to  take  place,  or  to  buy  the  product  after  it  takes 
place,  the  greater  the  risk  of  finding  a  market  of  producing 
consumers.  Hence,  as  bank  loans  rise,  the  rate  of  interest 
rises ;  as  bank  loans  fall,  the  rate  of  interest  falls,  because 
consumption  is  gaining  on  production,  although,  as  the  result 
of  a  crisis,  consumption  as  compared  with  former  consump- 
tion is  diminished.  Hence  to  attempt  to  regulate  the  interest 
on  bank  loans  by  law  is  utterly  abortive,  and  not  only  so,  but 
it  raises  the  rate  of  interest  by  adding  to  all  the  risk  of  find- 
ing a  market  for  the  goods  produced  the  risk  of  evading  the 
law.  This  risk  adds  much  to  the  rate  of  interest,  although 
practically  few  losses  arise  from  disregarding  the  law. 
Were  there  no  bank  loans,  the  rate  of  interest  in  the  United 
States,  under  a  perfectly  redeemable  and  well  secured  na- 
tional currency  of  bank-notes,  would  depend  upon  the  accu- 
mulation of  capital,  the  rate  of  profits,  the  facilities  of  inter- 
course between  borrowers  and  lenders,  taxation  and  risk. 
The  great  irregularities  in  the  rate  of  bank  interest  depend 
chiefly  upon  the  latter  element  of  risk.  Steadiness  of  rate 
is  thought  to  be  the  most  important  element  for  producers  ; 
and  undoubtedly  it  is,  but  it  is  not  an  objective  reality  in 
itself,  existing  independently  of  other  considerations',  but 
the  result  of  harmonious  production. 

Regulation  of  the  rate  of  interest  on  bank  loans  is  there- 
fore impossible  in  the  face  of  so  many  controlling  elements, 


REGULATION  OF  INTEREST  BY  LAW. 


319 


among  which  is  greatly  increased  risk  in  consequence  of  the 
uncertainty  of  finding  a  market.  The  risk  of  finding  a 
market,  and  therefore  the  rate  of  interest,  grows  with  bank 
loans,  until  immediately  before  and  during  a  panic  which 
sometimes  apparently  ushers  in  a  crisis,  fabulous  rates  of 
interest  are  offered,  until,  the  crisis  having  been  fairly  in- 
troduced, the  banks  are  ready  to  loan  again,  or  rather  to 
renew  loans,  because  they  are  no  longer  in  danger  them- 
selves, and  are  willing  to  protect  their  customers,  after  they 
are  safe  themselves,  or  after  their  own  bankruptcy  is  estab- 
lished, as  the  case  may  be.  Production  then  falls  off  be- 
cause the  fact  of  overproduction,  which  is  excessive  produc- 
tion on  credit,  is  then  established,  and  a  reaction  sets  in 
which  brings  down  the  prices  of  the  overproduced  article, 
precisely  as  it  brings  down  the  rate  of  interest.  Both  fall 
in  the  same  proportion  that  both  had  formerly  risen.  This 
is  a  true  analysis  of  interest  on  bank  loans.  Independently 
of  bank  loans  the  controlling  elements  are  the  same,  but 
there  is  a  vast  difference  in  the  amount  of  the  risk.  Hence, 
independently  of  bank  loans,  the  rate  of  interest  is  com- 
paratively steady.  But  all  loans  to  producers  involve  more 
or  less  risk,  and  all  such  loans  are  made  in  expectation  of 
profit  to  the  borrower,  interest  being  in  all  cases  the  fixed 
and  agi'eed  share  of  the  lender.  Now  to  attempt  by  law  to 
fix  this  rate  is  more  practicable  than  to  attempt  to  fix  by 
law  the  profits  of  the  borrower,  but  it  is  in  principle  quite 
as  unreasonable  while  it  is  practically  productive  of  more 
injustice  to  the  borrower  than  to  the  lender.  How  did 
the  idea  of  prohibiting  usury  and  fixing  the  rate  of  interest 
by  law  arise,  and  how  is  it  still  maintained  ? 

It  must  have  arisen  in  those  early  stages  of  society  when 
no  loans  of  money  to  producers  were  made,  because  society 
had  not  developed  to  a  sufficiently  complex  state  for  that 
purpose.  The  use  of  money  as  a  series  of  units  of  valuation, 
purchase,  and  payment  localized  in  some  commodity,  and 
hence  assuming  the  appearance  of  an  ordinary  commodity 
like  our  gold,  silver,  and  copper  coins,  arose  at  a  very  early 
period  in  the  development  of  society,  and  continued  for  a 


820 


POLITICAL  ECONOMY. 


long  period  before  loans  of  money  to  producers  and  mer- 
chants took  place  to  any  important  extent.  Every  man 
was  his  own  producer  and  merchant ;  but  money  being  in 
use  to  make  exchanges,  while  there  could  be  at  the  same 
time  no  call  for  loans,  except  on  the  part  of  those  who  did 
not  expect  to  make  any  profit  by  investing  it  in  labor  or 
merchandise,  but  wanted  it  for  a  time  to  enable  them  to 
procure  some  article  which  for  the  time  they  could  not 
otherwise  obtain,  to  exact  interest  on  the  money  which  the 
lender  could  for  the  time  spare,  and  on  which  the  borrower 
could  make  no  profit,  seemed  to  be  unjust.  That  idea  has 
lingered  and  still  lingers.  It  no  longer  has  any  foundation 
of  fact  to  support  it,  and  for  the  true  interest  of  all  pro- 
ducers and  therefore  of  the  whole  commercial  world,  it 
ought  now  to  give  way. 


CHAPTER  XII. 


ANALYSIS  OF  THE  TAXATION  OF  MONEY  AND  ITS  EESULTS. 

Tete  taxation  of  money  logically  results  from  the  mercan- 
tile theory  of  money  as  possessed  of  intrinsic  value,  and 
being  an  end  in  itself  instead  of  only  means  to  an  end. 
Money  cannot  be  consumed,  nor  can  it  produce :  it  is  only 
a  potent  auxiliary  to  production.  To  tax  money  is,  so  far, 
double  taxation,  so  long  as  all  capital  and  all  commodities 
are  taxed.  Money  in  the  possession  of  an  individual  is  the 
evidence  of  products  exchanged  and  consumed  by  others. 
To  tax  it  as  capital  is  to  tax  the  holder  of  money  by  way 
of  excise  on  this  consumption  of  others,  and  on  the  produc- 
tion which  he  individually,  or  representatively,  by  loan, 
will,  in  the  future,  cause  to  take  place.  To  tax  depositors 
for  the  amount  of  their  deposits  is  to  tax  them  first  for 
their  share  of  money  in  the  reserve,  and  then  through  their 
share  in  bank  debt  over  and  above  reserve,  for  so  much  pro- 
duction on  credit,  the  products  of  which  are  not  yet  sold, 
while  the  producer  who  owns  the  goods  is  taxed  for  a  like 
amount  as  owner  of  the  goods.  To  tax  the  banks  on  their 
deposits  is  to  tax  money  in  the  reserve  a  second  time  by  way 
of  excise,  for  the  consumption  it  demonstrates  to  have  taken 
place,  and  for  the  production  it  will  by  loan  cause  to  take 
place  in  the  future.  To  tax  the  banks  for  the  debt  they 
owe  to  depositors,  over  and  above  reserve,  is  to  tax  a  second 
time  the  production  on  credit,  which  that  debt  demonstrates 
to  have  taken  place,  and  before  any  sale  of  the  product. 

When  banks  are  taxed  on  deposits,  therefore,  there  is 
double  taxation,  through  reserve,  and  threefold  taxation 
through  bank  debt.  There  is  but  one  remedy,  —  to  tax  only 
income,  in  order  to  avoid  double  and  threefold  taxation, 

21 


322 


POLITICAL  ECONOMY. 


or  what  is  perhaps  more  practicable,  as  far  as  possible  by 
way  of  excise.  The  subject  is  complex,  however,  like  all 
others  in  reference  to  money,  and  difficult  for  people  at 
large  to  comprehend ;  but  the  propriety  of  taxing  income 
alone,  or  reaching  it  as  nearly  as  possible,  through  consump- 
tion, ought,  it  would  seem,  to  be  susceptible  of  being  made 
plain,  without  very  rigorous  analysis.  Taxation  of  money 
is  born  of  the  mercantile  theory  of  money  as  an  ordinary 
commodity  and  an  end  in  itself.  It  is  neither,  because  the 
more  an  ordinary  commodity  is  used,  the  higher  goes  the 
price,  quantity  remaining  the  same ;  but  the  more  money  is 
used,  the  lower  goes  its  price,  quantity  remaining  the  same. 
Hence  it  is  a  matter  of  absolute  demonstration,  that  it  can 
by  no  possibility  be  in  its  character  of  money  a  commodity 
in  the  same  sense  as  copper  or  wheat.  Hence,  also,  it  fol- 
lows that  it  is  a  conventional  process  through  a  series  of 
units  to  distribute  the  fruits  of  labor,  by,  first,  valuing, 
secondly,  acquiring,  and  thirdly,  paying  for  them ;  because 
in  no  other  way  could  such  a  result  follow.  We  thus  arrive 
at  the  logical  and  therefore  natural  development  of  the  orig- 
inal idea  of  money  as  a  mode  of  valuation  by  units,  into  the 
same  units  localized  and  limited  by  a  commodity  and  again 
by  units  of  debt  in  bank  and  government  notes.  The  same 
mercantile  idea  has  developed  the  erroneous  theory  that 
banks  deal  in  debt,  while  the  circulation  outside  of  banks 
consists  of  bank-notes  and  metal,  because  a  bank  could  un- 
doubtedly sell  credits  by  book  entry  to  be  used  in  payments, 
and  as  fast  as  these  were  deposited  could  loan  them  as  it 
would  bank-notes,  but  they  must  be  deposited  before  the 
bank  could  deal  in  them :  whatever  is  the  circulation  outside 
is  that  which  is  deposited  and  in  which  banks  deal.  But  a 
promise  or  liability  evidenced  by  a  piece  of  paper  is  substan- 
tially the  same  as  a  promise  or  liability  of  record,  and  in  the 
absence  of  convertibility  means  units  of  money  limited  by 
commodities  according  to  the  original  idea,  with  the  further 
developed  and  also  realized  idea  of  localization  and  limita- 
tion in  paper  or  book.  Hence,  in  order  to  understand 
money,  we  must  go  back  to  the  original  idea  and  follow  the 


THE  TAXATION  OF  MONEY  AND  ITS  KESULTS.  323 


development  of  it.  In  this  way  and  in  no  other  can  all  the 
phenomena  be  explained.  If  we  can  overmaster  the  mer- 
cantile theory,  we  shall  see  further  that,  in  order  to  com- 
plete our  knowledge  of  money,  we  must  look  at  the  results 
it  accomplishes  aside  from  the  process  itself.  If  the  oftener 
the  same  total  of  units  of  money,  however  localized  and 
limited,  is  used,  the  less  becomes  the  value  of  each  unit, 
this  means  that  inversely  so  much  higher  goes  the  value  of 
each  unit  of  commodities  exchanged  for  it :  the  two  values 
are  inverse  to  each  other.  All  this  accounts  plainly  and 
clearly  for  the  fact  that  in  deposit  and  discount  banks  the 
depositors  can  always  get  all  of  their  money  they  may  want, 
because  everybody  is  not  using  money  at  the  same  time  : 
when  one  man  out  of  ten  thousand  is  using  his  money  or  a 
part  of  it,  ten  are  not  using  their  money  at  all,  and  there 
is,  practically  speaking,  scarcely  an  assignable  limit  to  the 
use  of  deposits  by  banks,  except  when  a  panic  resulting 
from  overstock  occurs.  This  practically  unlimited  power 
of  the  banks  to  put  money  in  circulation  by  loan  accounts 
fully  for  overstock,  and  nothing  else  will ;  for,  money  aside, 
the  natural  law  of  decreasing  value  in  a  commodity,  through 
the  increase,  by  manufacture,  of  its  units,  checks  overstock 
within  short  periods,  if  the  commodities  are  supposed  to  be 
brought  directly  together  for  exchange,  but  where  money 
is  used  to  exchange  them,  the  increase  of  the  units  of 
money  for  that  purpose,  through  bank  loans,  raises  the  price 
of  the  units  of  commodities,  in  opposition  to  the  natural 
law  of  depreciation,  while  it  at  the  same  time  lowers  the 
price  of  the  units  of  money,  and  by  the  very  fact  of  doing 
so,  until  the  natural  law  of  depreciation  at  last  asserts  itself  ^ 
in  a  crisis.  The  full  development  of  the  fundamental  idea 
of  money  having  been  thus  arrested,  not  in  fact  but  uncon- 
sciously in  the  minds  of  men,  the  mercantile  theory  has 
been  of  service  in  conveying  the  idea  of  absolute  and  not 
relative  value  in  money  treasure,  as  in  plate  and  jewelry. 
This  has  had  the  conservative  effect  of  keeping  large  masses 
of  treasure  from  being  used  as  money  in  such  a  way  as  to 
affect  the  stability  of  prices.    The  persistence  of  the  idea 


324 


POLITICAL  ECONOMY. 


has  kept  money  from  being  paid  where  it  has  been  accu- 
mulated in  large  masses,  except  in  exchange  for  commodi- 
ties, in  like  manner  as  it  had  been  received  in  exchange  for 
commodities.  The  stability  of  its  purchasing  power  has 
thus  been  maintained  by  limiting  its  use  exactly  in  propor- 
tion to  the  increased  use  of  commodities.  The  mercantile 
theory,  therefore,  has  a  beneficial,  because  a  conservative, 
effect  in  limiting  the  use  of  money  by  the  actual  increase 
of  commodities,  but  it  has  a  pernicious  effect  in  banking 
by  having  naturally  and  logically  developed  the  idea  of 
economy  in  money,  like  economy  in  fuel  or  household  con- 
sumption of  any  kind.  The  economy  consists,  first,  in  the 
increase  of  the  total  number  of  units  of  money  distributed 
through  commerce,  by  the  instrumentality  of  bank-notes ; 
and  when  the  redemptions  in  the  commercial  world's  gold 
are  complete,  this  in  the  end  does  not  materially  increase 
production ;  secondly,  in  the  increase  of  the  circulation  of 
the  units  of  money  belonging  to  depositors  by  loaning  to 
producers,  while  still  supplying  all  the  calls  of  depositors. 
The  general  effect  is  to  be  looked  at,  and  that  is  the  same 
as  if  the  producers  had  borrowed  the  necessaries  of  life  to 
produce  on  credit,  and  the  bankers  had  guarantied  the  loans. 
To  tax  money,  therefore,  is  in  effect  not  to  tax  a  real  thing 
having  an  absolute  existence,  but  a  process  of  production 
and  consumption  :  it  is  not,  in  a  national  or  commercial 
world's  point  of  view,  to  tax  a  reality,  but  the  mode  by 
which  it  is  brought  about. 

Thus  the  examination  of  money  in  each  aspect  of  its 
complex  development  is  more  or  less  to  repeat  analysis, 
because  the  grand  object  of  money  is,  in  its  first  stage,  to 
exchange  commodities;  in  its  second,  to  help  to  create  them 
as  well  as  to  distribute  them  ;  and  thirdly,  through  deposit 
and  discount  banking,  to  give  still  further  aid  in  creating 
while  at  the  same  time  distributing. 


CHAPTER  XIII. 


TARIFFS  AND  PRODUCTION. 

The  subject  of  "  protection  to  home  industry  "  has  no  di- 
rect while  it  has  an  indirect  relation  to  the  subject  of  money 
and  its  uses  ;  for  "  protection  "  bears  upon  production,  while 
production  is  largely  carried  on  by  means  of  loans  of  money, 
received  for  goods  actually  exchanged  for  consumption,  in 
the  absence  of  bank  loans ;  and  under  banks  of  deposit  and 
discount  to  a  considerable  extent  by  means  of  loans  made  in 
excess  of  such  exchanges  for  consumption. 

It  is  not  true  that  tariffs  or  taxes  cause  commercial  crises 
as  sometimes  asserted,  nor  is  it  true  that  improved  machin- 
ery and  improved  processes  of  manufacture,  progressively 
requiring  fewer  and  fewer  hands  to  work  them,  are  causes 
of  such  crises.  To  suppose  so  is  to  suppose  that  real  ad- 
vancement is  retrogression,  although  the  improved  machin- 
ery and  processes,  as  well  as  taxes,  may  help  to  accelerate 
or  intensify  the  effects  of  a  commercial  crisis,  after  the 
primary  cause  has  acted.  That  primary  cause  is  excess  of 
production  on  credit,  as  elsewhere  shown.  But  how  can  a 
tariff  aid  in  accelerating  or  intensifying  the  result  ?  It  can 
aid  in  two  ways,  first,  as  a  tax,  and  secondly,  as  a  bounty. 
It  can  aid  as  a  tax,  because  the  more  taxes  there  are,  so 
much  less  is  the  profit  fund  which  supplies  consumption, 
restores  what  is  lost  by  waste,  and  adds  the  remainder  to 
capital.  The  tariff,  like  all  taxes,  helps  to  deplete  the  fund 
out  of  which  producing  consumers  supply  their  wants,  leav- 
ing them  so  much  the  less  to  exchange  with  those  who  have 
overproduced  on  credit,  and  who  are  so  far  deprived  of  a 
market,  but  it  is  not  because  it  is  a  tariff  to  protect,  but  be- 
cause it  is  a  tax.    The  consumption  of  those  who  spend 


326 


POLITICAL  ECONOMY. 


the  money  collected  through  tariffs  and  other  taxes  is,  on  an 
average,  of  the  same  kind  with  an  equal  number  of  other 
people  taken  at  large ;  but  all  taxes  help  to  increase  the 
excess  of  relative  as  compared  with  absolute  necessaries, 
when  production  on  credit  is  excessive,  as  in  the  United 
States.  The  unproductive  consumption  which  takes  place 
by  reason  of  a  tariff  furnishes  a  better  market  for  the  ab- 
solute than  for  the  relative  necessaries  of  life,  whose  pro- 
duction is  supposed  to  be  protected  by  the  tariff ;  but  the 
general  result  is  the  same,  whether  the  money  is  collected 
through  a  tariff  or  any  other  tax.  The  consumers  of  prod- 
ucts consumed  by  the  aid  of  money  collected  through  a 
tariff,  help  to  accelerate  a  commercial  crisis,  not  because  the 
money  is  collected  through  a  tariff,  but  from  the  fact  that 
it  must  be  collected,  and  paid,  whether  it  be  by  means  of 
an  ordinary  tax  or  by  a  tariff,  in  order  to  pay  the  expenses 
and  debts  of  government.  The  higher  the  rate  of  taxation, 
the  less  all  producing  consumers  have  to  enable  them  to 
consume  after  they  have  paid  their  taxes.  There  is  all 
around,  then,  in  proportion  to  the  total  of  taxes  collected, 
whether  by  tariff  or  otherwise,  a  loss  of  ability  to  exchange 
in  consequence  of  taxation,  whether  accomplished  through  a 
tariff  or  any  other  mode  of  taxation ;  and  the  unproductive 
consumers  who  spend  the  money  buy  more  of  the  producers 
of  absolute  necessaries  who  have  no  protection,  than  of  the 
producers  of  the  relative,  who  are,  by  supposition,  protected. 
As  a  tariff  is  paid  —  at  least  in  the  United  States  —  on 
relative  necessaries,  if  it  were  not  laid  on  the  article  which 
pays  it,  it  would  be  laid  on  some  other  article  of  relative 
necessity.  If  laid  on  raw  material,  it  raises  the  price  of 
the  manufactured  article  accordingly,  to  the  producing  con- 
sumer, bringing  about  the  same  result,  in  the  way  of  ex- 
hausting the  producing  consumer's  power  to  buy  the  arti- 
cle. 

But  if  the  raw  material  be  necessary  in  order  to  produce 
a  protected  article,  the  tariff  on  raw  material  is  equivalent 
to  taking  off  so  much  from  the  tariff  on  the  protected  arti- 
cle, so  far  as  the  protected  producer  is  concerned,  and  thus 


TARIFFS  AND  PRODUCTION. 


327 


SO  far  defeats  the  protection  of  one  producer  by  partially- 
protecting  another.  But  it  makes  no  kind  of  difference,  so 
far  as  its  influence  can  aid  in  bringing  on  a  commercial 
crisis,  where  or  how  the  total  of  taxation  may  be  laid :  it 
is  simply  an  exhaustion,  greater  or  less,  according  to  the 
higher  or  lower  rate  of  all  taxation,  —  national,  state, 
county,  city,  town,  and  village,  —  of  the  total  power  of  ex- 
changing. The  producers  of  relative  necessaries  are  ex- 
hausted the  most,  because  they  relatively  sell  the  least  to 
the  unproductive  consumers,  who  consume  the  proceeds,  in 
commodities,  of  the  taxes  and  tariffs  collected.  Were  a  tax 
to  become  unnecessary,  by  reason  of  a  reduced  rate  of  taxa- 
tion, there  would  be  so  much  the  less  unproductive  con- 
sumption, and  therefore  so  much  the  more  productive  con- 
sumption. There  would  be  less  unproductive  consumption 
of  absolute  necessaries  through  that  portion  of  taxes  paid 
out  of  profits  realized  in  the  shape  of  cash  for  overstock  sold 
outside  of  a  consumer's  market,  and  therefore  in  a  market 
where  purchases  are  made  on  credit  in  the  guise  of  cash, 
and  so  far  the  elements  of  a  commercial  crisis  would  be 
diminished. 

In  a  national  point  of  view,  then,  taxation  of  all  kinds  is 
an  exhaustion  of  income  ranging  with  the  rate,  having  no 
direct  effect,  but  exhaustion,  except  where  production  on 
credit  has  been  carried  to  excess,  and  then  according  to  its 
greater  or  less  weight  it  aggravates  the  rate  of  exchange 
against  the  relative  necessaries  of  civilization  and  in  favor 
of  the  absolute  necessaries  of  life :  it  aggravates  the  differ- 
ence but  does  not  create  it.  The  difference  arises  from  a 
cause  which  is  paramount  to  all  taxation.  The  result  is 
the  thing  to  be  looked  at ;  and  in  every  case  the  result  of 
reduced  taxation  is  to  increase  the  ability  to  exchange  on 
the  part  of  the  producers  of  relative  necessaries ;  of  in- 
creased taxation,  to  exhaust  it.  If,  as  would  probably  hap- 
pen, the  taking  off  of  a  tariff  through  reduced  taxation 
sent  the  usual  average  of  those,  who  in  consequence  ceased 
to  be  non-productive  consumers,  to  the  production  of  abso- 
lute, and  the  usual  average  to  the  production  of  relative 


328 


POLITICAL  ECONOMY. 


necessaries,  there  would  be  so  much  the  less  unproductive 
consumption  on  the  credit  of  exchanges  between  absolute 
and  relative  necessaries  to  take  place  in  the  future.  It  is 
difficult,  therefore,  to  imagine  upon  what  grounds  it  is  as- 
serted that  a  tariff,  any  more  than  any  other  tax,  has  any 
direct  effect  in  bringing  on  commercial  crises.  It  may  be 
said  that  it  stimulates  production  and  thereby  the  tendency 
to  overproduction ;  but  if  it  does,  it  must  necessarily,  to  an 
equal  degree,  render  consumption  impossible,  by  raising  the 
relative  price  of  the  protected  article,  and  so  far,  by  checking 
consumption,  at  once  arrest  overproduction. 

Because  a  currency  must  give  steady  prices,  which  is  used 
only  for  the  exchanges  of  a  consumer's  market,  a  paper  cur- 
rency of  sound  banks  thus  used,  would  be  sufficient  without 
metal,  because  the  forces  moving  production  control  circula- 
tion, and  under  such  a  currency  taxes  would  have  no  influ- 
ence in  bringing  on  a  crisis,  because  with  harmony  of  pro- 
duction there  could  be  no  crisis.  But  because  inharmonious 
production  is  possible,  and  banks  furnish  the  conditions 
which  make  it  possible  in  Great  Britain  and  the  United 
States,  prices  rise  with  production  on  credit ;  and  they  then 
fall,  because  production  falls.  The  paramount  force  at  work 
is  production  (working  through  bank  loans),  which  progres- 
sively increases  and  then  progressively  diminishes  and  thus 
completes  its  cycle.  The  power  or  force  in  operation,  then, 
is  something  entirely  superior  to  tariffs  or  any  other  taxes, 
which  can  only  have  a  subordinate  influence  in  producing 
the  result.  So  far  as  a  tariff  acts  partly  as  a  bounty,  with- 
out stimulating  production  to  control  the  market  entirely,  it 
operates  unjustly  to  the  producing  consumer,  but  so  long  and 
so  far  as  it  operates  as  a  bounty,  it  partially  defeats  its  own 
ends  by  diminishing,  in  an  equal  degree,  the  power  of  the 
producing  consumer  to  exchange  for  the  article  protected  by 
bounty ;  but  ability  to  control  the  market  can  never  come 
under  our  currency.  On  the  whole,  with  a  few  changes  in 
favor  of  raw  material  and  perhaps  reduction  of  rates  on 
some  protected  articles  in  the  United  States,  and  possibly 
some  increase  for  revenue  purposes  on  others,  what  is  really 


TAEIFFS  AND  PRODUCTION. 


329 


wanted  for  American  as  well  as  English  producers  is  the 
protection  of  steady  prices,  which  will  aid  in  maintaining 
steady  production  and  arrest  overstock  by  arresting  over- 
production at  a  fixed  point.  This  is  a  kind  of  protection 
much  needed,  which  can  only  come  by  maintaining  a  fixed 
ratio  of  banking  reserve  to  bank  liability,  or  by  abandon- 
ing bank  loans.  There  will  be  more  protection  from  a 
sound  currency  than  from  any  other  cause  :  this  is  the  real 
avenue  to  foreign  markets  for  American  producers. 

The  question  of  the  policy  of  imposing  tariffs  for  the  pro- 
tection of  home  labor  is  not  a  question  of  money  at  all. 
Abstractly,  no  doubt,  and  indeed,  practically,  the  closest 
approximation  to  freedom  of  intercourse  is  desirable,  in 
order  to  promote  civilization  and  true  progress  ;  but  taxes 
must  be  levied  in  some  form,  and  if  a  tax  by  way  of  tariff  is 
levied  upon  importations  of  a  certain  kind,  the  end  in  view 
may  be  to  stimulate  the  home  production  of  that  article.  If 
the  stimulus  has  only  the  effect  for  an  indefinite  period  of 
supplying  by  home  production  a  part  of  the  demand,  the 
remainder  being  supplied  by  importation,  the  result  is,  to 
impose  a  bounty  on  the  production  of  the  home  article  at 
the  expense  of  the  consumer.  But  this,  although  taking 
from  A.  and  giving  to  B.,  may  be  justified  if  the  result  will 
be,  within  a  reasonable  time,  to  supply  the  consumer  with 
the  home  article  cheaper  than  before,  by  reason  of  the  estab- 
lished and  increased  production  at  home,  the  tariff  on  the 
protected  article  falling  off  entirely,  and  taxation,  by  tariff, 
on  that  article,  being  then  transferred  to  something  else. 

The  American  producer  absolutely  requires,  at  this  time, 
the  protection  of  a  stable  currency,  and  to  him  it  is  not 
material  whether  it  be  made  stable  by  silver  or  gold ;  the 
objections  to  the  remonetization  of  silver  are  of  a  national- 
financial,  and  international-commercial,  rather  than  a  na- 
tional-commercial character.  The  difficulty  lies  in  hitting 
the  bullion  ratio  in  the  world's  bullion  market.  If  the  ratios 
be  fixed  by  the  United  States  at  16  to  1  and  the  silver  bull- 
ion market  be  raised  in  consequence  from  the  present  rate 
of  say  17|  to  1,  to  16^  to  1,  thus  falling  short  of  the  Amer- 


330 


POLITICAL  ECONOMY. 


ican  ratio  of  valuation  by  three  per  cent.,  the  general 
government  will  be  absolutely  and  unquestionably  bound 
to  pay  the  difference  by  way  of  premium  on  every  delivery 
of  silver  it  makes.  To  repudiate  three  per  cent,  of  its  debt, 
is  what  the  government  of  the  United  States  cannot  afford 
to  do.  For  the  rest,  a  difference  of  exchange  varying  up  to 
three  per  cent,  against  the  United  States  will  follow,  unfor- 
tunately, but  unavoidably.  A  better  way  would  be  to  limit 
coinage  and  try  the  ratio  of  15i  to  1,  as  more  likely  to  agree 
with  that  of  the  world,  and  a  still  better,  to  postpone  it,  until 
all  nations  are  ready  to  agree  upon  a  ratio.  But  a  stable  cur- 
rency of  some  kind  is  essential,  because  although  the  exports 
of  the  United  States  are  partially  valued  in  United  States 
currency,  when  purchased  at  home,  because  the  latter  have 
an  influence  as  well  as  the  countries  to  which  the  produce  is 
sent,  in  fixing  the  price,  yet  under  all  circumstances  the  lat- 
ter, being  buyers  of  a  surplus,  will  have  the  largest  influence 
in  fixing  the  price,  and  the  exported  produce  must  necessa- 
rily be  disposed  of  at  relatively  lower  rates  than  produce  of 
a  kind  not  exported  ;  thus  increasing  the  nominal  expenses 
of  living,  proportionately  against  the  American  producer,  in 
consequence  of-  the  relative  depreciation  of  gold  as  money  in 
his  market,  compared  with  that  of  his  competitor,  and  so 
adding  relatively  to  the  cash  cost  of  his  production. 

But  tariffs,  unless  levied  on  raw  material,  have  no  effect 
in  increasing  nominal  cost  of  production  to  American  pro- 
ducers merely  because  they  are  tariffs.  This  cost  is  a  ques- 
tion of  currency  only,  while  it  is  not  a  question  of  currency 
merely  but  of  relative  exhaustion  of  producers  which  is 
raised  by  all  national,  state,  city,  county,  and  village  taxes, 
including  tariffs  in  their  character  of  taxes.  Under  the 
American  banking  system,  even  with  a  convertible  cur- 
rency, a  large  portion  of  taxes  of  all  sorts,  including  tariffs, 
is  paid  out  of  profits  declared  on  sales  of  stock,  which  finds 
no  consumer's  market.  This  is  paying  taxes  on  credit,  to 
unproductive  consumers,  on  the  side  of  the  producer  of  rel- 
ative, while  the  producer  of  absolute  necessaries  pays  his 
taxes  out.  of  profits  received  on  sales  in  a  consumer's  market. 


TARIFFS  Afe  PRODUCTION. 


331 


The  latter  market  is  drawn  upon  largely  in  excess  of  the 
former,  which  tells  as  an  auxiliary  in  helping  to  accelerate  a 
crisis.  But  it  is  not  protection  which  does  this  ;  it  is  taxa- 
tion ;  and  the  greater  the  total  of  tax,  the  worse  for  the  side 
of  the  producer  of  relative  necessaries,  whether  protected  or 
not,  because  it  increases  the  glut. 


CHAPTER  XIV. 

MONETAEY  SYSTEM  AND  PKODUCTION  OF  FRANCE :  HOABD- 
ING  IN  FEANCB  AND  ELSEWHEBE. 

It  would  be  more  correct,  in  subordination  to  what  has 
already  been  said,  to  say  that  France  has  no  monetary  sys- 
tem, because,  with  the  exception  of  the  limited  influence  of 
the  Bank  of  France  as  a  bank  of  deposit  and  discount,  she 
has  no  established  system  of  maintaining  production  on  credit, 
the  circulation  of  money  being  left  to  itself.  All  the  vast 
total  of  remittances  to  pay  her  military  fine  to  Germany  were 
the  proceeds  of  goods  sold  in  a  consumer's  market,  where 
there  was  no  blocking  of  the  exchanges.  Money  cannot  be 
loaned  in  France  to  cause  new  production  faster  than  a  con- 
sumer's market  warrants  it,  because  the  money  loaned  is  all 
received  from  sales  in  that  market,  and  it  can  be  loaned  only 
as  fast  as  sales  are  made.  Such  is  necessarily  the  case  in  a 
country  using  a  metallic  circulation  for  the  most  part,  with 
only  moderate  issues  of  bank-notes.  The  metal  and  the 
notes  are  equally  distributed  by  real  commerce,  which  ex- 
changes between  two  producing  consumers  who  sell  com- 
modities, and  not  between  a  producer  who  has  only  money 
and  another  producer  who  has  only  labor.  The  secret  of 
the  prosperity  of  France  is,  that  she  has  no  overstock  to 
seriously  embarrass  her  anywhere,  and  hence  she  has  safely 
passed  through  the  disturbances  to  her  own  production  aris- 
ing from  the  commercial  crises  of  other  countries.  Her  tax- 
ation, by  reason  of  political,  not  industrial  causes,  is  enor- 
mous, and  with  a  system  of  banking  like  that  of  Great 
Britain,  and  the  United  States  she  could  hardly  have  suc- 
ceeded in  carrying  out  such  enormous  monetary  undertak- 
ings.   Her  debt  has  all  been  returned  to  her  from  abroad, 


MONETARY  SYSTEM  OF  FRANCE. 


333 


and  remains  at  home.  How  did  she  get  the  means  to  make 
such  enormous  payments  ?  By  sales  of  her  productions  in  a 
consumer's  market  —  the  market  of  true  commerce.  Her 
taxes  are  paid,  not  out  of  the  actual  profits  of  one  set  of  pro- 
ducers borrowed  by  those  of  another  set,  which  must  be  the 
case  with  taxes  paid  by  producers  on  the  credit  of  what  they 
have  produced,  but  not  sold,  or  which  the  purchaser  from 
them  cannot  sell.  The  taxes  are  not  merely  paid  in  coin, 
but  in  coin  which  has  just  before  made  exchanges  of  products 
between  two  producing  consumers,  instead  of  merely  going 
into  the  hands  of  the  tax-payers  in  the  character  of  money, 
which  has  enabled  products  to  appear  and  to  go  into  over- 
stock for  want  of  a  market.  All  this  has  been  accomplished 
without  deposit  and  discount  banking,  the  treasury  helping 
very  largely  in  making  the  money  exchanges.  Harmony  of 
production  with  sufficient  energy  of  production,  accumulated 
capital,  the  product  also  of  that  harmony  and  energy,  to- 
gether "vvith  economy,  are  the  active  causes  or  forces  which 
have  made  the  result  possible  by  the  aid  of  a  currency  the 
safest  because  the  steadiest  in  the  world,  —  that  of  a  metallic 
currency  distributed  by  real  commerce,  and  not  real  com- 
merce combined  with  commerce  on  credit  and  confidence  of 
future  exchanges  instead  of  actual  exchanges.  France  has 
had  a  very  harmonious  development  of  industry,  —  of  pro- 
duction on  the  side  of  absolute  as  well  as  relative  necessa- 
ries, —  producing  on  the  average  nearly  enough  of  the  former 
for  her  own  consumption. 

Again,  the  natural  inequalities  in  the  distribution  of  wealth, 
which  are  themselves  the  cause  of  increased  production  and 
of  all  civilization,  when  left  to  themselves  entirely,  have  not 
been  artificially  increased,  as  in  England  to  a  considerable 
and  in  the  United  States  to  an  enormous  extent,  by  pro- 
duction on  credit,  and  sales  in  the  speculative  markets  of 
overstock  to  merchants  who  do  not  know  that  they  are 
buying  on  speculation  (that  is  to  say,  on  the  chances  of  a 
market),  and  by  the  enormous  expenditures  on  labor,  out- 
side of  absolute  necessaries,  which  follow.  Enormous  losses 
through  bankruptcies  under  such  a  system  do  not  occur  in 


334 


POLITICAL  ECONOMY. 


France ;  they  do  in  the  United  States,  and  cause  not  only- 
loss  of  capital  and  of  productive  force,  and,  on  the  average, 
of  quantity  of  production,  but  also  increase  immensely  the 
natural  inequalities  in  the  distribution  of  capital,  already  suf- 
ficient without  any  artificial  stimulation.  There  is  no  loss 
of  productive  energy  in  France,  and  population  as  well  as 
production  approximating  its  limits  is  maintained  at  nearly 
the  same  figures. 

With  all  this  harmony  of  production,  it  is  not  so  sur- 
prising that  M.  J.  B.  Say,  in  his  treatise  on  Political  Econ- 
omy, maintained  with  such  force  the  impossibility  of  over- 
production. The  abstract  proposition,  which  is  true,  was 
and  is  verified  by  the  practical  proposition  as  matter  of  fact 
upon  short  averages  in  France ;  and  why  ?  Because,  as  I 
have  demonstrated  before  in  numerous  forms,  the  abstract 
proposition,  although  necessarily  true  upon  the  average,  is 
false  outside  of  the  average.  In  order  to  create  it,  there 
must  be  variations  on  each  side  of  average.  The  variations 
are  slight,  if  left  to  themselves,  —  slight  at  least  for  all 
practical  purposes ;  but  because  there  can  be  comparatively 
little  economy  in  the  use  of  absolute,  while  there  may  be 
very  great  in  the  use  of  relative  necessaries,  the  immense 
improvements  in  machinery  and  processes,  and  in  agriculture 
of  all  kinds,  as  well  that  devoted  to  the  production  of  raw 
material  as  of  absolute  necessaries,  —  the  latter  never  being 
overproduced,  —  overproduction  of  the  relative  necessaries 
has  not  been  created  or  caused,  but  rendered  possible,  —  pos- 
sible because  it  has  frequently  appeared.  But  because  pro- 
ducers, including  workmen,  must  live  on  credit  purchases  of 
the  absolute  necessaries  while  producing  the  relative,  not 
directly  upon  mercantile  credit  or  some  other  credit  of  a  sim- 
ilar kind,  but  in  the  shape  of  money  paid  out  for  labor,  and 
through  labor  for  these  necessaries,  in  excess  of  the  actual 
exchanges  of  the  products  of  that  labor  for  the  necessaries, 
thus  causing  an  exchange  of  money  for  necessaries  only,  the 
tendency  to  excess  of  production  in  respect  to  relative  neces- 
saries, through  the  causes  before  mentioned,  is  carried  so  far 
as  to  create  a  crisis  in  production  before  it  is  arrested,  -r- 


MONETARY  SYSTEM  OF  FRANCE. 


335 


first,  from  the  unlimited  power  of  loaning,  and,  secondly, 
from  the  rise  of  prices  resulting  from  the  increasing  circula- 
tion by  means  of  increasing  loans.  The  natural  tendency  of 
all  comparative  overproduction  (and  there  is  no  other)  is 
to  depreciate  the  product  as  the  overproduction  advances. 
This  depreciation  is  an  ever-present  demonstration  of  loss ; 
and  this,  if  it  be  impossible  to  borrow  the  means  of  continu- 
ing it  by  the  aid  of  loans,  checks  it  at  very  short  intervals. 
The  money  lent  in  France  in  order  to  produce  is  lent  by 
capitalists,  and  they  receive  it  only  as  it  is  returned  to  them 
by  borrowers  who  have  sold  stock  or  overstock.  But  the 
overstock  is  merely  nominal.  Practically  it  is  not  over- 
stock ;  it  is  only  a  stock  sufficient  to  supply  customers,  and 
in  this  sense  some  overstock  is  essential.  The  utmost  ex- 
tent to  which  production  on  credit  can  be  carried  is  hm- 
ited  by  the  possible  total  that  can  be  on  loan  at  any  one 
time.  There  can  be  no  expansion  of  loans  beyond  the  Hmits 
allowed  by  the  money  actually  found  in  the  various  reserves 
of  capitalists.  Loans  cannot  vary  without  reference  to  these 
reserves,  as  they  could  be  made  to  vary  if  all  the  gold  were 
consolidated  in  one  reserve,  and  as  they  do  vary,  without 
reference  to  the  reserve,  in  the  Bank  of  England.  But  is 
there  not  a  large  amount  of  metal  in  small  reserves  called 
sometimes  hoards  in  France,  which  are  not  loaned  to  pro- 
ducers, and  therefore  have  no  direct  influence  on  production? 
Doubtless  there  are  such  reserves,  and  they  have  compara-- 
tively  little  effect  upon  production,  but  still  they  have  their 
appropriate  share,  because  they  have  been  received  in  ex- 
change for  products  sold.  The  money  in  one  hoard  may 
occasionally  go  out  of  that  hoard  into  another  in  exchange 
for  land,  and  it  may,  by  reason  of  that  exchange,  be  brought 
into  the  mass  of  loanable  money  for  the  purposes  of  produc- 
tion; but  all  such  movements  are  slow,  and  have  but  little 
influence  upon  production.  But  suppose  all  the  hoards  to 
be  brought  together,  and  kept  out  on  loan  for  the  benefit  of 
the  owners  alone.  A  stimulus  to  production  would  undoubt- 
edly result,  but  it  would  have  its  fixed  and  not  its  variable 
limitation,  and  therefore  it  would  not  be  an  unhealthy  stim- 


336 


POLITICAL  ECONOMY. 


ulus.  It  would  have  its  fixed  limitation  in  the  impossibility 
of  reloaning  any  money  once  loaned  until  it  came  back  into 
the  grand  hoard  through  actual  sales  of  the  commodities 
produced  by  the  aid  of  former  loans.  The  power  of  loaning 
would  be  limited  by  the  sale  of  commodities,  and  not  the 
production  of  commodities.  Now  the  sales  of  commodities 
vary  everywhere,  undoubtedly  ;  but  they  vary  in  France  on 
short  average,  because  the  demand  they  supply,  if  there  is  no 
disturbing  cause,  varies  on  short  averages.  This  last  average 
is  the  true  regulator,  because  it  is  the  paramount  force  which 
regulates  production,  and,  through  production,  the  circulation 
of  money.  Paying  out  money  for  commodities,  and  loaning 
money  to  produce  them,  constitute  the  circulation  or  expan- 
sion of  money,  and  receiving  it  in  exchange  for  commodities, 
and  in  payment  of  loans,  constitutes  contraction.  There  can 
be  no  expansion  of  loans  beyond  payment  of  loans,  there- 
fore, even  if  all  the  money  in  the  grand  hoard  is  loaned  out 
as  soon  as  the  consolidation  of  the  hoards  takes  place.  Pro- 
ducers, on  loaning  to  them  all  the  money  in  the  grand  hoard, 
immediately  invest  it  in  production,  and  so  produce  on  credit, 
but  they  cannot  produce  another  franc's  worth  until  they  sell. 
Now  all  this  money  is  banked  or  massed  and  then  loaned,  to 
cause  production  on  credit ;  but  there  is  a  fixed  limitation  to 
the  production  in  the  comparatively  fixed  average  of  con- 
sumption. Production  on  credit  would  raise  prices  until  the 
money  in  this  bank  was  exhausted,  and  then  the  upward 
turn  of  prices  would  be  arrested.  The  final  result  would 
be  production  on  credit,  limited  by  a  nearly  average  reserve 
of  cash  in  the  bank.  But  allow  the  owners  of  the  hoards  to 
merely  bank  their  money  in  an  ordinary  savings  bank,  re- 
ceiving a  fixed  rate  of  interest  for  the  money,  the  managers 
making  all  the  loans  themselves,  every  owner  of  a  hoard  can 
be  furnished  with  his  money  whenever  he  wants  it,  and  at 
the  same  time  there  will  be  no  fixed  limit  to  loans.  All  the 
money  wanted  on  loan  can  be  had  subject  to  one  condition 
only,  —  that  every  hoard-owner  shall  be  paid  whenever  and 
as  he  wants  the  whole  or  a  part  of  his  money.  Loans  will 
now  vary  as  production  on  credit  varies,  and  will  no  longer 


MONETARY  SYSTEM  OF  FRANCE. 


337 


have  their  limitation  in  the  sale  of  commodities.  What  is 
the  cause  of  the  change  ?  The  change  comes  from  the  vari- 
ation in  what  are  called  deposit  loans.  There  will  be  a 
drawing  out  going  on  on  the  part  of  some  of  the  hoard- 
owners,  and  a  putting  in  on  the  part  of  others.  These  cur- 
rents mutually  supply  each  other,  seventy-five  per  cent,  of 
the  money  remaining  out  on  loan  upon  the  average,  as  we 
will  suppose.  This  seventy-five  per  cent,  is  an  excess  of  all 
the  circulation  in  exchange  for  commodities,  and  labor  to 
produce  those  commodities,  which  could  possibly  have  taken 
place  if  the  hoards  had  not  been  banked  at  all.  But  the 
twenty-five  per  cent,  reserve  still  supplies  the  same  amount 
of  circulation  that  it  did  before  the  banking  of  the  hoards. 
If  it  remains  steady  all  the  time  at  twenty-five  per  cent., 
no  more  loans,  and  therefore  no  more  production  on  credit, 
will  take  place,  except  as  the  reserve  is  increased  above 
twenty-five  per  cent.  The  future  circulation  of  money  out  of 
that  reserve  or  bank  will  be  limited  by  actual  exchanges  of 
commodities.  But  if  loans  are  not  stopped  at  that  or  some 
other  definite  point,  they  will  continue  indefinitely  to  be 
made  out  of  the  incoming  stream  of  deposits,  and  therefore 
in  excess  of  the  outgoing  stream,  which  pays  for  commo- 
dities and  the  labor  which  supplies  them  only  as  fast  as 
exchanged  and  consumed.  All  the  interest  paid  on  this  ex- 
cess of  loans  is  paid  on  credit,  because  in  excess  of  actual 
exchanges.  It  is  paid,  not  on  sales,  but  on  commodities 
produced  in  expectation  of  sales.  Now  introduce  this  sys- 
tem generally  in  France,  and  production  would  be  largely 
increased  ;  introduce  commercial  banks  of  deposit  and  dis- 
count everywhere,  and  make  the  savings  banks  their  auxil- 
iaries, and  we  have  substantially  the  American  and  English 
systems.  Less  gold  and  silver  would  be  needed,  and  the 
distribution  of  these  metals  would  be  seriously  disturbed. 
But  it  would  be  impossible  to  introduce  them  all  at  once  ;  a 
change  of  this  kind  would  be  slow,  and  its  effects  would  not 
therefore  be  so  injurious.  Under  all  circumstances,  the  per- 
sistence of  national  habits  would  be  the  source  of  safety. 
But  suppose  the  whole  American  banking  system  in  full 

22 


338 


POLITICAL  ECONOMY. 


operation  :  what  would  circulate  in  France  ?  Would  not 
France  have  a  solid  "  monetary  system  "  like  that  of  Eng- 
land, the  Bank  of  France  taking  the  place  and  performing 
the  functions  of  the  present  Bank  of  England  as  depositary 
of  the  treasure  of  the  various  banks  ?  Would  not  the  notes 
of  the  Bank  of  France  vary  as  gold  now  actually  varies  in 
France  ?  Nothing  of  the  kind.  They  would  vary  accord- 
ing to  the  volume  of  them  paid  out  for  labor,  and  raw  mate- 
rial, which  is  labor  accumulated  in  results  ;  and  this  will  be 
demonstrated  by  a  rising  scale  of  loans  continually  increas- 
ing, in  excess  of  the  metal  coming  in,  and  therefore  varying 
away  from,  and  not  with  it.  Now  will  the  resulting  clear- 
ings and  book  entries  be  themselves  the  payments  which  will 
be  made  into  and  out  of  the  reserve,  or  will  they  only  register 
the  payments  going  in  and  the  payments  going  out  ?  Cer- 
tainly they  will  be  only  a  register.  In  one  sense  only  will 
there  be  any  credit  or  any  debt  connected  with  the  move- 
ments of  the  reserve.  It  will  be  the  resulting  credit  of  de- 
positors and  corresponding  debt  of  the  banks,  which  is  shown 
by  the  constantly  and  slowly  advancing  excess  of  payments 
above  receipts.  This  difference  marks  the  advance  of  produc- 
tion on  credit  in  excess  of  producing  consumers'  markets, 
which  is  going  on,  and  to  a  corresponding  degree  the  amount 
of  products  consumed  in  supporting  the  producers  on  credit, 
in  anticipation  of  future  sales  of  their  overstock.  The  result 
is  the  same  as  if  these  producers  had  borrowed  the  necessa- 
ries they  thus  consume  upon  the  pledge  of  the  overstock 
guarantied  by  their  own  capital,  with  a  collateral  guaranty 
by  bankers.  It  is  mistaking  this  effect  for  an  active  cause 
which  has  led  British  and  American  writers  and  bankers  in 
the  very  midst  of  this  kind  of  banking  to  suppose  that  the 
actors  in  this  drama  of  commerce  and  banking  were  merely 
balancing  their  debts  by  credits  and  their  credits  by  debts. 
There  is  in  the  result,  not  a  balancing  of  debts,  although  bal- 
ancing is  continually  going  on,  but  a  borrowing  of  absolute 
necessaries  to  pay  for  producing  relative  necessaries.  There 
is  no  other  way  or  mode  of  borrowing  to  an  extent  sufficient 
to  produce  such  a  result  as  a  commercial  crisis  but  through 


MONETARY  SYSTEM  OF  FRANCE. 


339 


a  credit  circulation  of  money.  The  laborer,  the  stockholder, 
the  merchant,  and  the  capitalist,  who  receives  money,  does 
not  know,  and  does  not  stop  to  inquire,  whether  the  money 
he  receives  has  come  from  sales  of  produce  which  will  not  be 
consumed  for  years,  from  cash  paid  over  as  profits  on  such 
sales,  from  resales  of  the  produce,  or  from  loans  paid  through 
such  sales.  Nevertheless,  the  fact  is,  that  the  producers  owe 
all  this  money,  and  through  and  by  having  borrowed  it  in 
excess  of  actual  exchanges  of  commerce,  have,  as  a  result  of 
all  the  money  exchanges,  merely  borrowed  the  necessaries 
of  life  for  the  most  part  from  capitalists,  which  they  must 
refund  in  the  shape  of  money  by  sales  of  the  overstock, 
making  good  the  loss  out  of  capital,  the  banker  losing  what 
they  are  unable  to  pay.  This  is  the  kind  of  credit  that  is 
used,  and  the  kind  of  debt  that  results.  The  exchanges 
which  are  cleared  through  the  bank,  and  which  look  to  these 
writers  and  bankers  like  a  set-off,  are  not  those  of  a  con- 
sumer's market ;  they  are  merely  the  exchanges  of  purchasers 
on  credit  from  those  who  have  produced  on  credit,  by  substi- 
tuting the  former  for  the  latter  as  bank  debtors,  with  enough 
more  loaned  to  pay  for  profits.  The  exchanges  of  a  con- 
sumer's market  would  produce  a  very  different  result,  be- 
cause they  would  cause  payments  into  the  reserve.  Hence, 
banking  reserve  always  increases  when  the  volume  of  ex- 
changes of  a  consumer's  market  exceeds  that  of  sales  on 
credit  after  the  clearings  are  completed. 

The  question  may  now  be  well  put :  Would  France  or  the 
commercial  world  be  benefited  by  her  introducing  the  Amer- 
ican or  the  English  banking  system  in  full  ?  Unquestion- 
ably, no.  It  would  introduce  into  her  industry  and  her  com- 
merce as  serious  perturbations  as  she  has  suffered  in  her  body 
politic,  and  which,  for  the  advancement  of  civilization  and 
the  peace  of  the  world,  it  is  to  be  hoped  she  will  gradually 
overcome.  It  would  greatly  injure  her  and  disturb  the  ratios 
of  metallic  distribution.  Whether  the  introduction  of  the 
banking  system  gradually  in  the  future,  when  the  true  nature 
and  effects  of  banking  are  understood,  and  a  plan  of  limit- 
ing bank  loans  by  a  fixed  rule  is  adopted,  is  another  question 


340 


POLITICAL  ECONOMY. 


which  need  not  now  be  discussed.  One  thing  is  certain : 
that  in  the  present  state  of  knowledge  on  that  most  difficult 
and  complex  subject  of  money,  bullion  values,  circulation 
of  money,  banking,  etc.,  she  is  better  off  in  her  present  con- 
dition, because  the  overruling  forces  which  control  the  ex- 
changes of  commodities,  through  demand,  and  thereby  the 
subordinate  forces  of  money  circulation,  by  which  the  ex- 
changes to  meet  demand  are  effected,  are  now  left  to  their 
natural  limitations,  and  not  temporarily  subverted  by  ex- 
change of  credit  in  the  shape  of  money  for  commodities,  by  a 
large  class  of  producers  who  produce  beyond  their  ability  to 
exchange.  That  France  is  better  off  to-day  with  the  hoards 
as  they  are,  than  with  the  hoards  consolidated  and  loaned 
under  deposit  and  discount  banking,  is  unquestionable.  The 
truth  of  this  proposition  ought,  in  the  opinion  of  practical 
men,  to  be  considered  as  demonstrated  by  her  present  con- 
ditions and  by  what  she  has  accomplished.  Money  being 
in  true  science  a  conventional  commodity,  —  and  to  call  it 
commodity  at  all  in  the  ordinary  sense  of  a  commodity  is 
only  a  convenient  stepping-stone  towards  its  true  designa- 
tion, —  possessing  value  only  in  what  it  buys,  and  having 
no  productive  qualities  in  itself,  whether  interest  can  ad- 
vantageously be  paid  for  the  use  of  it  under  given  condi- 
tions is  a  national  and  not  a  local  or  personal  question.  If 
it  will  increase  not  only  the  total  of  production,  but  find 
markets  for  the  additional  production  it  causes  through  loans, 
to  take  place,  then  the  loans  are  advantageous ;  otherwise 
not.  With  the  present  abundant  production  of  raw  material, 
and  increasing  economy  of  hand  labor,  production  on  credit 
needs  to  be  checked,  and  the  only  means  of  checking  it  lie  in 
controlling  the  rate  of  production  through  loans.  There  are 
too  many  away  from  the  plow,  and  constantly  leaving  it  to 
to  earn  their  living  in  other  fields,  and  the  only  remedy  is 
to  send  many  of  them  back.  They  can  only  be  sent  by  a 
limitation  of  the  extent  to  which  they  shall  be  allowed  to 
produce  on  credit.  The  improved  machinery  and  economize^d 
labor  are  so  much  advancement  gained  by  mankind,  but 
it  is  turned  into  a  curse  instead  of  a  blessing,  as  it  ought  to  be, 


MONETARY  SYSTEM  OF  FRANCE. 


341 


by  the  want  of  any  limitation  to  loans  except  an  indus- 
trial crisis.  The  improvements  have  enhanced  the  dangers, 
but  tliey  are  not  the  cause  of  the  principal  effect ;  and  it  is 
exceedingly  important  to  get  rid  of  the  fallacy  existing  in 
the  assertion  that  they  are  the  cause  or  even  one  cause :  they 
only  advance  the  conditions  under  which  the  cause  is  made 
more  effective.  Interest  is  paid,  not  only  out  of  the  profits 
of  production  realized  through  the  exchanges  of  markets  of 
producing  consumers,  but  out  of  profits  borrowed  on  produc- 
tion before  goods  come  to  that  market.  All  the  interest  of 
the  first  kind  paid  is  paid  to  the  advantage  of  the  whole  coun- 
try, and  the  more  of  it  the  better ;  all  the  interest  of  the  lat- 
ter kind  is  to  the  disadvantage  of  the  country,  and  the  less 
of  it  the  better. 

But  why  have  not  the  enormous  issues  of  inconvertible 
bank-notes  by  the  Bank  of  France,  equaling  perhaps,  if  not 
exceeding,  the  total  of  gold,  silver,  and  convertible  bank- 
notes of  the  bank  in  the  hands  of  the  people  at  the  time  of 
their  issue,  and  following  the  late  Franco-Prussian  war, 
advanced  prices  to  a  much  higher  point  than  existed  be- 
fore the  war  ?  If  gold  and  silver  have  a  mercantile  value,  and 
the  notes  were  used  as  a  substitute,  why  did  not  the  notes 
depreciate  largely  below  the  mercantile  value  of  the  coin,  if 
there  be  no  essential  difference  between  gold  regarded  as  an 
ordinary  commodity  and  gold  as  money  ?  If  the  paper  did 
not  become  a  substitute,  such  immense  issues  ought  to  have 
caused  great  loss  to  the  holders.  But  it  did  nothing  of  the 
sort.  There  was  probably  some  rise  of  prices,  but  in  re- 
spect to  that  we  have  no  reliable  or  definite  account.  The 
rise,  however,  must  have  been  slight,  otherwise  it  would 
have  been  specially  noticed,  and  we  should  have  heard  of  it. 

Can  this  important  fact  be  explained  upon  the  mercantile 
theory  any  more  than  the  fact  that  between  1793  and  1816 
in  England,  when  Bank  of  England  notes  were  at  a  discount 
of  twenty  per  cent.,  they  had  lost  purchasing  power  or  value 
in  exchange  to  more  than  twice  that  amount,  while  sub- 
stantially the  same  may  be  said  of  paper  money  after  the 


342 


POLITICAL  ECONOMY. 


close  of  the  late  civil  war  in  the  United  States  ?  There  is 
but  one  theory  which  explains  it,  and  that  is  the  one  I  have 
given  and  have  in  reality  repeatedly  demonstrated  already  ; 
and  that  is,  the  theory  that  money  is  a  conventional  process 
for  exchanging  commodities,  and  labor  and  commodities,  by 
a  series  of  units  located  and  limited.  This  is  what  money 
really  is,  although  the  mercantile  theory  of  it  as  a  com- 
modity cannot  probably  be  eradicated  for  reasons  which  I 
have  given,  and  ought  not  to  be,  except  as  a  scientific  proposi- 
tion. The  inconvertible  bank-notes  of  the  Bank  of  France 
formed  in  every  hoard  or  merchant's  money  reserve,  a  sum 
equal  on  the  average  to  all  the  metal  in  it ;  the  volume  of 
money  was  doubled,  and  yet  prices  did  not  materially  rise. 
The  metal  was  retired  by  the  notes  and  the  notes  took  its 
place  :  the  old  mercantile  theory  retired  the  metal  as  if  it 
were  bullion  or  plate,  and  put  the  paper  to  a  good  use  as  a 
unit  of  valuing,  purchasing,  and  paying  power,  guarantied  to 
be  maintained  as  such  by  the  bank,  and  virtually  by  the 
government  of  France.  Here  are  the  two  theories  in  prac- 
tice side  by  side  ;  one  retiring  the  metal  as  having  intrinsic 
mercantile  value,  and  the  other  putting  the  paper  unit  in 
circulation  as  having  no  such  value,  except  in  those  commod- 
ities it  can  value,  purchase,  and  pay  for.  Such,  undoubt- 
edly, is  the  theory  of  holders  when  paper  money  is  indefi- 
nitely inconvertible  ;  and  if  gold  and  silver  were  to  go  out 
of  use,  and  an  international  paper  currency  guarantied  by 
governments  to  take  their  place,  such  would  be  the  latter. 
The  objections  to  such  a  currency  would  be  the  want  of  the 
absolute  and  definite  limitation  to  the  multiplication  of  units, 
which  may  also  be  called  the  self-acting  limitation  existing 
by  the  very  necessities  of  the  case,  in  silver  and  gold,  and 
also  the  absolute  impossibility  of  any  substitute  for  the  mer- 
cantile theory  being  applied.  That  theory  retires  vast  sums 
in  such  countries  as  China,  which,  if  used  as  freely  for  circu- 
lation as  they  would  be  if  paper  money,  might  have  very  dis- 
turbing effects.  In  such  countries  the  demand  for  money  as 
a  valuable  commodity  like  plate,  to  keep  until  wanted,  must 
be  large  ;  and  such  is  the  case  in  all  countries  where  a 


MONETARY  SYSTEM  OF  FRANCE. 


343 


temporarily  inconvertible  currency  is  issued.  Even  in  the 
United  States,  before  the  banking  and  commercial  crisis  of 
1857,  one  hundred  millions  of  dollars  in  gold  were  virtually 
retired  from  circulation  by  a  currency,  all  nominally,  and  a 
large  portion  really,  convertible.  Gold  as  well  as  silver  will 
retire  more  or  less  from  circulation,  under  a  paper  currency 
entirely  convertible,  unless  a  fixed  ratio  of  bank  reserve  to 
liabilities  can  be  maintained  ;  and  then  it  will  be  forced  into 
circulation,  concurrently  with  bank-notes,  aud  will  supply 
and  be  supplied  by  the  reserve. 

These  are  the  reasons  for  the  retirement  of  French  gold 
and  silver  as  so  much  bullion  and  plate  for  the  most  part, 
and  the  appearance  of  the  paper  in  their  place.  The  paper 
did  not  materially  raise  prices,  because  there  were  no  banks 
to  give  it  a  circulation  in  excess  of  actual  exchanges.  It 
did,  however,  in  all  probability,  carry  up  the  price  of  rentes^ 
for  which  it  was  largely  exchanged,  to  the  great  advantage  of 
the  government  and  people.  Hence,  if  gold  and  silver  were 
the  exclusive  currency  of  the  world,  without  any  banks 
whatever,  nobody  would  be  receiving  interest  unless  some- 
body were  earning  interest,  as  his  representative  in  the 
great  field  of  production,  and  the  theory  of  mercantile  value 
in  gold  and  silver  would  be  only  a  matter  of  curiosity  in  the 
development  of  money  and  its  uses,  and  not  of  any  practical 
importance.  But  since  the  theory  has  such  a  strong  hold 
upon  the  human  understanding,  that  it  is  still  at  this  day 
taught  as  matter  of  science,  while  )3y  reason  of  the  develop- 
ment of  the  complex  results  of  banking  there  is  a  practical 
application  of  it  to  regulate  banking  reserve,  and  furnish  a 
substitute  for  a  commodity,  in  what  is  called  bank  credit, 
the  theory  must  be  subverted  by  actual  demonstration.  It  is 
doubtful,  however,  whether  any  practical  benefit  can  be  re- 
alized very  soon  from  the  demonstration  ;  but  in  time  it  must 
prevail  sufficiently  to  produce  some  results  in  respect  to 
banking.  For  the  present,  France  is  better  off  without 
banks.  Exchanges,  maintained  at  average  within  short 
periods  because  left  to  themselves,  —  that  form  of  debt  and 
credit  which  consists  in  lending  and  borrowing  the  use  or 


344 


POLITICAL  ECONOMY. 


circulation  of  money  in  excess  of  those  exchanges  being  very 
limited,  —  persistence  of  national  habits,  except  as  they  are 
slowly  modified  by  time,  energy  of  production  and  the  econ- 
omy which  results  from  no  misdirection  of  that  energy, 
make  France  prosperous.  Her  "  monetary  system  "  is  good 
because  it  does  not  interfere  with  these. 


CHAPTER  XV. 


BULLION  VALUES  :  MONEY  VALUES  ;  BULLION  AND  MONEY 
VALUES  COMPARED  :  A  COMMERCIAL  CRISIS  THE  LIMITA- 
TION OF  EXPANSION  FOR  GOLD  AS  WELL  AS  PAPER, 
UNDER  A  VARYING  RATIO  OF  BANKING  RESERVE. 

The  misconceptions  existing  about  bullion  values  grow, 
like  most  others  relating  to  money,  out  of  the  theory  of 
mercantile  value  in  gold  and  silver  coin,  the  commodity  or 
barter  value  of  the  metal  being  confounded  with  that  of  the 
coin.  Gold  and  silver  coin  being  supposed  to  be  ordinary 
commodities,  like  other  metals  which  are  not  used  as  money 
(and  it  is  almost  impossible  to  resist  the  illusion  that  they 
are  such),  the  relations  between  the  two  metals  in  bullion  are 
constantly  misunderstood.  As  silver  has  depreciated  in  the 
bullion  market  of  London,  in  consequence  of  Germany  and 
the  nations  of  the  Latin  Union  having  stopped  free  coinage, 
objections  have  been  raised  by  scientists,  bankers,  and  cap- 
italists to  its  remonetization  by  the  United  States.  No  suffi- 
cient reasons  have  been  advanced  yet,  although,  from  one 
point  of  view,  good  objections  may  be  urged.  It  is  impossi- 
ble to  point  out  the  true  objections  upon  the  mercantile  theory 
of  bullion  values  being  the  same  as  money  values.  They  can 
be  correctly  explained  only  upon  the  theory  advanced  in  this 
work.  If  silver,  when  remonetized  in  the  United  States,  were, 
in  its  character  of  money,  to  be  regarded  as  a  mercantile  ar- 
ticle in  the  same  sense  with  silver  bullion,  there  can  be  no 
rational  objection  whatever  to  its  remonetization  by  the 
United  States,  on  the  part  of  bond-holders  and  bankers,  be- 
cause remonetization  in  that  sense  means  simply  using  the 
metal  at  its  bullion  value  reckoned  in  gold,  and  gold  at  its 
bullion  value  reckoned  in  silver,  if  it  will  stay  in  the  coun- 


846 


POLITICAL  ECONOMY. 


try  so  that  it  can  be  used.  But  why  will  it  not  stay,  if  silver 
is  remonetized,  and  both,  in  their  character  of  money,  have  a 
mercantile  value  like  other  commodities  ?  They  must  cer- 
tainly both  stay,  if  one  stays,  provided  both  have  mercantile 
value.  There  will  certainly  be  an  effective  demand  in  the 
sense  in  which  that  term  is  used  by  writers,  if  the  mint  of- 
fers to  coin  both  freely.  Legislation  cannot  fix  the  value  of 
either  alone,  or  of  each  relative  to  the  other,  in  exchanges  of 
the  two  metals,  because  that  cannot  be  accomplished  as  to 
commodities,  even  by  imperial  power.  There  can  be  no  ob- 
jection, then,  upon  the  mercantile  theory  to  the  remonetiza- 
tion,  because  the  commodity  silver  will  be  worth  as  much  in 
the  market  of  the  United  States,  reckoned  in  commodities 
and  therefore  in  gold,  as  it  will  be  in  London,  and  no  more. 
But  silver  has  fallen  in  London  from  a  point  where  fifteen 
and  one  half  pounds  of  it  were  worth  one  pound  of  gold,  to 
a  point  where  seventeen  and  three  fourths  to  seventeen  and 
one  half  pounds  are  worth  one  pound  of  gold.  It  is  still 
claimed  that  the  United  States  will  be  defrauding  their  cred- 
itors by  free  remonetization  at  the  rate  of  sixteen  pounds 
of  silver  for  one  of  gold,  which,  we  will  suppose,  will  ad- 
vance silver  in  price  as  bullion,  so  as  to  make  sixteen  and 
one  half  pounds  of  it  in  London  worth  one  pound  of  gold,  — 
the  United  States  allowing  it  to  be  coined  at  the  former  rate, 
or  buying  all  the  bullion  that  offers  at  market  price  and  coin- 
ing it  themselves.  But  how  can  the  United  States  coin  at 
that  rate,  if  it  comes  short  by  one  half  pound  of  silver  for 
every  sixteen  pounds  coined,  or  say  three  per  cent,  of  the  rel- 
ative barter  values  of  the  two  metals  in  London  ?  It  is  im- 
possible for  two  commodities  to  be  exchanged  without  val- 
uing each  in  the  other  by  units,  and  the  valuing  units  stand, 
as  between  equal  weights  of  the  two  metals,  thirty-three  for 
gold  and  two  for  silver,  after  remonetization  by  the  United 
States  has  produced  its  full  and  final  effect.  This  makes 
no  difference  upon  the  mercantile  theory,  because  the  United 
States  do  not  possess  imperial  power,  and  if  they  do,  they 
cannot  compel  people  to  exchange  commodities  at  rates  they 
choose  to  dictate.    But  it  is  said  that  something  of  this  kind 


BULLION  VALUES;  MONEY  VALUES.  347 


will  occur  through  the  remonetization  of  silver,  and  let  us 
assume  that  loss  will  ensue  in  some  way,  to  public  as  well  as 
to  private  creditors  and  money  holders,  by  lowering  the 
"  standard."  There  is  but  one  way  of  lowering  the  standard 
conceivable,  and  that  is  by  taking  the  risk  of  raising  the  rate 
of  barter  exchange  between  the  metallic  commodities  silver 
and  gold  in  London,  in  favor  of  the  former,  to  the  figures  of 
the  rate  of  barter  exchange,  at  which  they  may  coin,  say  16 
and  1.  If  the  two  barter  rates  agree,  they  have  harmed 
nobody,  and  nobody  can  complain.  But  if  they  fall  short 
by  one  half  pound  on  every  sixteen  pounds  of  silver,  or  say 
three  per  cent.,  the  gold  coin  will  all  leave  the  silver  in  the 
United  States,  as  silver  at  one  time  left  the  gold,  not  be- 
cause the  silver  coin  which  takes  its  place  is  a  commodity 
in  such  abundance  as  to  produce  an  inflation  of  prices,  and 
not  because  one  unit  dollar  of  gold  is  worth  more  in  the 
United  States  than  one  unit  dollar  of  silver  in  purchasing 
power,  but  because  the  barter  rate  of  exchange  between  the 
two  metals  in  the  United  States  is  at  variance  with  that  of 
the  commercial  world  in  London,  and  the  gold  coin  can  be 
exported  and  bartered  for  silver  there,  to  import  and  make 
silver  dollars  of  equal  purchasing  power  with  the  departing 
gold  ones,  with  a  profit  of  three  per  cent.  The  wrong,  then, 
if  there  be  one,  lies,  not  in  changing  the  value  of  a  com- 
modity, which  is  impossible,  but  in  not  coining  at  the  bar- 
ter rates  of  exchange  between  silver  and  gold  in  the  commer- 
cial world's  markets,  and  making  creditors  who  wish  to  buy  in 
foreign  markets  pay  the  difference  before  they  can  use  their 
money.  The  wrong  has  no  direct  relation  to  the  exchange- 
able value  of  the  money  unit  at  home  in  point  of  purchasing 
power.  The  United  States  long  since  indirectly  demonetized 
silver  by  undervaluation,  which  caused  it  to  leave  and  gold 
to  take  its  place  ;  and  a  few  years  since  it  followed  this  up 
by  direct  demonetization,  except  for  subsidiary  uses.  It  has 
no  right,  therefore,  by  free  coinage,  to  remonetize,  unless  it 
can  and  does  make  its  silver  dollar  exchange  at  par  for  its 
gold  dollar,  by  making  their  bullion  weights  in  silver  and 
gold  harmonize  with  their  relative  bullion  values. 


348 


POLITICAL  ECONOMY. 


The  bullion  in  the  unit  is  not  the  unit  itself :  it  is  the  dol- 
lar, or  the  macoute,  which  is  the  unit,  limited  by  and  local- 
ized in  two  commodities  brought  together  for  exchange  when 
in  its  first  stage  of  development,  but  now  limited  by  and 
localized  in  the  metallic  commodities.  These  constitute  the 
commercial  world's  money,  and  the  barter  rate  of  exchange 
between  them  varies  but  little  on  each  side  of  average.  Dol- 
lar is  one  of  the  standard  units,  thus  limited  and  localized  in 
gold  and  silver.  Standard,  in  the  sense  of  a  mercantile  com- 
modity of  so  many  grains  weight,  has  no  existence  but  in  a 
fallacy.  The  only  standard  possible  is  the  standard  unit 
called  macoute,  dollar,  pound,  or  franc,  having  purchasing 
power  in  the  abstract  inversely  with  the  increase,  and  di- 
rectly with  the  decrease  in  the  total  number  existing,  and 
actual  purchasing  power  inversely  with  the  number  used  to 
make  a  particular  purchase.  But  suppose  silver  to  have 
been  always  in  use  in  the  United  States,  with  free  coinage, 
and  never  to  have  been  demonetized  by  them,  either  directly 
or  indirectly.  Having  issued  a  large  amount  of  transferable 
undertakings  in  the  shape  of  bonds,  scattered  all  over  the 
commercial  world,  has  it  the  right  to  pay  in  silver  its  cred- 
itors who  reside  where  silver  is  not  in  use,  after  demonetiza- 
tions by  other  nations,  which  sink  its  bullion  value  as  com- 
pared with  gold,  say  ten  per  cent.,  unless  it  makes  good  the 
difference  between  its  own  barter  rates  and  those  of  the 
commercial  world  as  they  may  be  at  the  time  ? 

But  before  answering  this  question,  it  is  necessary  to  de- 
fine with  more  rigorous  accuracy  what  bullion  value  is.  Gold 
bullion  and  silver  bullion  are  mercantile  commodities,  which 
are  valued  in  each  other  for  the  principal  use  of  manufact- 
uring units  of  money,  and  the  subordinate  use  of  making 
plate,  jewelry,  etc. 

The  principal  use  controls  the  subordinate  use,  and  there- 
fore the  bullion  value  arises  chiefly  from  the  quantity  of 
metal  coined,  and  subordinately  from  the  quantity  manufact- 
ured: as  the  annual  supply  of  one  metal  increases,  it  be- 
comes cheaper,  and  more  of  it  goes  into  manufacture.  The 
result  must  necessarily  be,  supposing  both  metals  to  be  in 


BULLION  VALUES:  MONEY  VALUES.  349 


universal  demand  for  coinage,  a  tendency  to  carry  into,  and 
to  keep  equal  values  of  each  in  coin,  and  therefore  equal 
values  in  plate,  etc.,  the  comparative  cheapness,  and  larger 
mass  of  silver,  causing  relatively  much  more  waste  and  loss 
of  it  than  of  gold.    But  as  the  principal  use  controls  the 
subordinate  use,  how  can  the  principal  use  itself  be  appor- 
tioned between  the  two  metals,  and  upon  what  principle? 
That  of  relative  quantities  by  weight,  coined,  because  no 
other  apportionment  is  possible.    The  intrinsic  qualities  of 
the  metals,  beyond  the  fact  that  both  are  entirely  suitable 
for  money,  cannot  be  considered,  because  they  have  no  rela- 
tion to  the  use.    The  valuation,  therefore,  is  of  the  simplest 
kind,  because  one  of  relative  weight  only,  excluding  the  con- 
sideration of  the  complex  questions  of  comparative  utility 
which  would  arise  in  exchanging  other  commodities,  and 
which  did  arise  even  with  the  savages,  using  the  abstract 
and  ideal  units  called  macoutes.    The  relations  between  the 
two  kinds  of  bullion  are  thus  made  plain.    The  demonetiza- 
tions by  Germany  and  the  nations  of  the  Latin  Union,  by 
stopping  free  coinage,  have  removed  a  large  element  of  de- 
mand, and  thus  changed  the  relative  bullion  values  by  depre- 
ciating silver  in  barter  value  relatively  to  gold,  and  appreci- 
ating gold  in  barter  value  relatively  to  silver.    The  question 
about  the  right  of  the  United  States  to  pay  its  creditors  in 
silver  in  the  case  last  supposed,  and  at  what  rates,  can  now 
have  an  intelligent  answer.    The  United  States  are  under 
an  implied  guaranty  of  some  sort :  What  is  it  ?    Is  it  the 
guaranty  that  they  will  pay  a  certain  weight  or  quantity  of 
silver  for  every  bond  of  one  thousand  dollars  they  have  is- 
sued ?  or  is  it  that  the  purchasing  power  or  value  in  ex- 
change of  the  unit  dollars  they  will  deliver  for  their  bonds 
shall  not  lose  exchangeable  value  by  loss  arising  from  their 
own  act,  or  that  of  any  other  government?    If  the  former 
be  their  undertaking,  then  if  money  is  an  ordinary  com- 
modity they  are  not  responsible  for  the  depreciation,  and 
may  justly  pay,  by  delivering  the  quantity  of  metal  required 
to  make  one  thousand  silver  dollars,  in  the  shape  of  one  thou- 
sand of  those  dollars  coined  at  the  old  weights :  they  will 


350 


POLITICAL  ECONOMY. 


then  deliver  precisely  what  they  agreed  to  deliver,  accord- 
ing to  the  tenor  of  their  bond.  But  if  the  commodity  theory 
is  unsound,  the  United  States  are  bound  by  their  implied 
guaranty  to  sustain  the  purchasing  power  of  their  dollar 
unit  in  behalf  of  creditors  against  the  effect  of  their  own 
acts,  and  that  of  all  other  governments,  so  far  as  actual  loss 
can  be  demonstrated.  This  they  are  unquestionably  bound 
to  do,  because  otherwise  they  will  force  their  citizens  who 
are  money-holders,  and  all  creditors,  who  buy  or  pay  in  in- 
ternational markets  to  lose  the  difference  between  two  barter 
rates  of  exchange.  In  other  words,  they  are  bound  to  do 
exactly  what  Germany  and  the  nations  of  the  Latin  Union 
are  doing. 

But  suppose  free  monetization  of  silver  at  the  rate  of  six- 
teen pounds  of  silver  to  one  of  gold,  and  the  price  of  silver 
bullion  in  London  to  rise  in  consequence  to  the  rate  of  only 
sixteen  and  one  half  pounds  of  silver  to  one  of  gold,  thus 
making  silver  dollars  worth  less  than  gold  dollars,  what  will 
be  the  result  ? 

It  may  be  that  for  a  considerable  time  the  price  of  many 
articles  of  merchandise  exported  will  not  rise  in  proportion 
to  this  difference ;  but  whether  they  do  or  not,  a  more  or 
less  arbitrary  premium  of  exchange,  founded  on  relative  bull- 
ion values,  will  prevail ;  and  the  United  States  will  be  com- 
pelled to  pay  three  per  cent,  premium  on  all  the  silver  they 
deliver,  unless  they  repudiate,  because  they  must  do  it  for 
all  creditors,  or  none,  inasmuch  as  all  will  claim  it.  The 
supposed  national  gain  will  be  in  the  gain  of  relative  barter 
value  of  silver,  a  matter  of  small  importance  compared  with 
the  inconveniences  which  will  result.  That  the  United 
States  may  remonetize  provided  they  pay  the  difference  in 
bullion  values ;  or  without  the  difference,  if  they  in  their 
remonetization  put  the  bullion  values  at  a  point  which  they 
will  reach  and  sustain  in  the  bullion  markets,  is  unques- 
tionable. It  is  not  the  fact  of  recoinage  which  is  wrong,  but 
not  putting  the  ratio  of  recoinage  low  enough.  What  the 
United  States  are  bound  to  do  is  to  maintain  their  standard 
unit  dollar  for  the  benefit  of  all  creditors  and  money-holders 


BULLION  VALUES:  MONEY  VALUES. 


351 


against  their  own  acts,  or  those  of  other  nations.  Every 
nation  having  assumed  the  right  to  act  as  it  may  choose  in 
relation  to  monetization  and  demonetization,  each  is  bound 
to  protect  its  own  citizens,  and  all  its  creditors  and  money- 
holders.  All  this  I  have  discussed  fully  in  the  chapter  on 
the  Redemption  of  CuiTency. 

The  sum  of  the  matter  in  respect  to  bullion  values  of 
silver  and  gold  is  this  :  silver  and  gold  have  been  the  ma- 
terial employed  by  the  commercial  world  from  such  remote 
antiquity  that  no  historical  records  can  inform  us  with  even 
approximate  probability,  as  a  matter  of  history,  when  the  use 
began,  and  whether  the  use  of  one  metal  preceded  that  of 
the  other  or  not.  Historical  criticism,  reasoning  from  plain 
matter  of  fact,  if  applied  in  this  quarter  of  human  develop- 
ment, would  probably  lead  to  the  conclusion  that  the  use  of 
these  and  other  metals  began  with  commerce.  But  the 
earliest  recorded  instance  of  its  use  shows  that  it  was  em- 
ployed as  a  unit  of  valuation,  purchase,  and  payment,  what- 
ever the  human  idea  arising  out  of  the  use  might  be.  The 
shekels  were  weighed  out  by  Abraham,  by  a  well  known 
standard  of  weight,  precisely  as  miners  would  weigh  out 
silver  in  their  purchases  if  there  were  no  mint,  and  as  the 
miners  of  California  weighed  out  gold.  It  is  impossible  to 
use  any  commodity  as  money  in  any  other  way ;  all  com- 
modities are  sold  in  the  same  way.  But  because  the  metallic 
commodity  is  used,  not  to  consume  for  the  purpose  of  supply- 
ing actual  personal  wants,  but  to  make  such  exchanges  as 
will  satisfy  those  wants,  the  commodity  which  supplies  the 
material  of  money  is,  so  far  as  this  use  is  concerned,  governed, 
not  directly,  but  only  indirectly  and  partially,  by  the  laws 
governing  the  value  of  other  commodities  ;  and  in  point  of 
science  must  be  taken  out  of  the  list  of  commodities.  Its 
exchangeable  value  as  money,  therefore,  falls  with  its  in- 
crease, and  rises  with  its  decrease  in  quantity  by  weight, 
whether  one,  two,  or  more  metals  are  used.  If  two  (silver 
and  gold)  are  universally  used,  their  relative  values  as  bull- 
ion to  coin  money  must  on  the  whole  be  to  each  other  as 
the  respective  quantities  being  on  the  average  coined.  This 


352 


POLITICAL  ECONOMY. 


is  the  primitive  valuation  by  macoutes,  which  here  become 
units  of  weight.  It  is  merely  an  exchange  of  metallic  com- 
modities by  valuing  units  of  weight,  as  the  condition  prece- 
dent to  making  of  them  both,  units  of  money  for  universal 
use  in  exchange.  The  last  use  is  not  the  first  use,  but  is  the 
result  of  the  first  use.  The  latter  use  can  only  be  carried 
into  effect  by  means  of  the  first.  The  first  is  the  establish- 
ment of  a  rate  of  exchange  between,  and  an  actual  exchange 
of,  the  two  metals  as  the  only  possible  method  by  which  both 
can  be  used  together  as  money.  The  commodity  exchange 
must  precede  the  use  of  both  metals  as  money  in  universal 
exchange  :  it  is  impossible  to  use  both  without  first  establish- 
ing the  relations  which  shall  govern  their  joint  use  ;  and 
those  relations  are  the  relations  of  weight,  because  intrinsic 
qualities,  if  considered  at  all,  would  make  the  problem  too 
complex  for  solution,  and  the  adoption  of  some  other  kind 
of  money  absolutely  unavoidable.  But  there  is  another 
element  which  precedes  the  solution  of  the  problem,  which, 
although  very  complex,  requires  no  calculation,  because  it  is 
always  solving  itself,  by  self-acting  machinery.  Gold  and 
silver  are  wanted  in  the  arts  and  in  manufactures.  Both 
are  well  adapted  to  certain  uses,  and  there  are  some  uses  to 
which  one  goes  more  extensively  than  the  other ;  but,  on 
the  whole,  the  extent  of  this  use  must  be  governed  very  much 
by  relative  increase  and  decrease  in  supply  of  each  metal  by 
weight.  If,  by  way  of  illustration,  the  average  product  of 
silver  be  called  40  and  that  of  gold  1,  the  larger  mass  and 
relative  cheapness  of  silver  would  cause  much  more  of  it 
by  weight  to  be  used  in  the  arts  and  in  manufactures  than 
of  gold.  This  more  extensive  use,  and  comparative  cheap- 
ness, would  expose  more  of  the  silver  than  of  gold  to  destruc- 
tive agencies,  and  to  loss.  Hence,  under  an  approximately 
universal  use  of  both  metals  as  money,  as  well  as  for  the 
other  uses  named,  the  commodity  or  bullion  values  have  of 
late  averaged  15^  and  1.  Joint  legislation,  representing 
universal  consent  through  universal  remonetization  of  both 
metals,  could  declare  that  silver  should  be  coined  only  when 
the  commodity  or  barter  values  were  20  and  1.    In  that  case 


BULLION  VALUES:  MONEY  VALUES.  353 


money  would  absorb  all  the  silver  whidh  arts  and  manufact- 
ures would  not  take  at  that  rate  ;  but  the  effect  would  be 
to  diminish  the  production  of  silver  and  disturb  the  ratios 
of  metallic  material  going  into  use  as  money  to  the  totals 
of  the  masses  already  coined.  "When  the  nature  of  money  is 
understood  by  scientists  themselves,  a  general  remonetization 
will  probably  be  urged ;  and  in  consonance  with  the  commer- 
cial ideas  of  our  time,  and  to  avoid  the  great  inconvenience 
of  transporting  and  caring  for  treasure  of  such  weight  as 
silver,  governments  ought  to  receive  it  in  storage  and  issue 
certificates.  The  decisive  objection  to  fixing  by  universal 
legislation,  following  treaty,  the  rate  at  which  silver  shall  be 
coined  below  its  natural  ratio  is  the  disturbance  of  the 
metalHc  ratios  of  production  of  either  metal  to  its  total 
mass  already  in  the  shape  of  coin  and  being  continually  in- 
creased. If,  without  creating  such  disturbance,  thirteen  and 
one  half  pounds  of  silver  could  be  carried  into  arts  and  man- 
ufactures, out  of  say  the  fifteen  or  fifteen  and  one  half  pounds 
which  would  be  actually  coined,  in  case  of  general  remone- 
tization of  silver,  it  would  be  most  desirable,  but  it  would 
be  impossible,  because  it  would  disturb  the  value  or  pur- 
chasing power  of  the  units  of  value,  purchase,  and  payment 
localized  in  and  limited  by  the  metal  coined. 

The  bullion  or  commodity  value  of  silver,  reckoned  in  the 
commodity  gold,  in  the  London  bullion  market,  has  therefore 
not  a  direct  but  an  indirect  bearing  upon  the  remonetiza- 
tion of  silver  by  the  United  States.  The  real  obligation  by 
which  the  United  States  are  as  matter  of  fact  bound  is,  not 
to  refrain  from  monetizing  silver  because  other  nations  have 
demonetized  it,  but  to  take  no  risk  of  maintaining  the  silver 
unit  known  as  a  dollar  at  the  same  purchasing  power  or 
value  in  exchange  with  their  gold  unit  known  also  as  a  dol- 
lar. Their  standard,  like  all  other  standards,  is  not  a  piece 
of  gold,  or  a  piece  of  silver,  but  a  unit  called  dollar.  If  this 
were  not  so,  it  would  be  impossible  for  them  to  make  one 
kind  of  dollar  worth  less  than  another  kind.  As  matter  of 
fact,  however,  they  can  make  the  silver  dollar  worth  less  than 
the  gold  dollar,  and  they  can  make  the  gold  dollar  worth  less 
23 


354 


POLITICAL  ECONOMY. 


than  it  has  been  at  home  and  abroad  by  coining  it  with  less 
gold.  The  obligation  of  the  United  States  is,  should  they  re- 
monetize  silver,  to  do  so  at  such  rates  as  will  make  the  silver 
dollar  worth  as  much  as  the  present  gold  dollar,  and  if  they 
fall  short  of  doing  so,  to  recoin  at  reduced  ratios  for  silver 
until  they  hit  the  true  ratio ;  and,  in  order  to  do  this,  they 
ought  to  make  sure  of  hitting  the  true  ratio,  by  making  it  low 
enough  to  a  reasonable  certainty.  But  in  carrying  out  this 
obligation  they  may  make  the  ratio  too  low  and  send  all  the 
silver  abroad.  If,  on  the  other  hand,  by  recoining  at  16  and  1 
they  still  leave  the  commodity  or  bullion  value  of  the  silver 
in  their  silver  dollar  worth  three  per  cent,  less  than  the  com- 
modity value  of  the  gold  in  their  gold  dollar,  it  may  and  un- 
doubtedly will  be  the  fact  that  for  a  long  time  the  purchasing 
power  of  their  silver  dollar  in  exchange  for  labor  and  com- 
modities at  home  will  be  worth  approximately  one  hundred 
cents,  while  the  commodity  value  of  its  bullion,  as  compared 
with  that  of  the  bullion  of  the  departing  gold  dollar,  will  be 
as  ninety-seven  cents  to  one  hundred  cents.  This  difference 
will  constitute  a  rate  of  bullion  or  commodity  exchange  which 
will  be  exacted  and  paid  frequently  without  any  full  com- 
pensating effects  to  the  payer.  To  produce  such  results  (if 
the  actors  knew  what  would  be  the  results  of  their  action) 
might  well  be  called  monetary  madness.  Every  government 
is  bound  to  maintain  the  rate  of  exchange  between  the  com- 
modities used  as  money,  and,  if  by  reason  of  the  acts  of  other 
governments  it  cannot  do  so,  to  interpose  by  legislation  or 
to  legislate  in  such  a  manner  as  to  prevent  it.  This  it  can 
do  only  by  stopping  free  coinage,  as  Germany  and  the  nations 
of  the  Latin  Union  have  done,  still  making  the  silver  already 
coined  to  circulate  as  before,  and  gradually  retiring  it  by  ex- 
changing it  for  gold  as  they  are  doing,  or  hope  to  be  able  to 
do ;  or  as  they  possibly  might  do  more  rapidly  by  issuing 
from  time  to  time  government  notes  (perhaps  redeemable  in 
gold),  and  thus  saving  their  silver  from  being  precipitated  on 
the  bullion  markets.  The  United  States  can,  without  creat- 
ing any  monetary  disturbance,  coin  one  hundred  and  fifty 
millions  of  silver,  and  allow  it  to  circulate  as  "  token  money," 


BULLION  VALUES:  MONEY  VALUES. 


355 


as  French  silver  by  reason  of  this  suspension  of  free  coinage 
is  now  doing.  This  money  would  be  here,  as  in  France,  as 
good  as  any  other  metallic  money,  except  that  it  would 
lose,  to  a  greater  or  less  degree,  the  natural  limitations  im- 
posed by  the  total  quantity  of  metallic  commodity  when  used 
in  universal  coinage.  It  is  not  so  much  a  forced  circulation 
that  results  from  it,  as  a  circulation  in  point  of  number  of 
units  in  excess  or  defect  of  that  which  free  coinage  at  the 
proper  ratio  would  give.  The  United  States  could  (possibly) 
make  their  token  coins,  redeemable  in  gold,  circulate,  but 
they  certainly  could  make  an  equal  amount  of  treasury  notes 
so  redeemable  circulate,  to  supplement  the  supply  of  gold. 
The  silver  would  entail  a  useless  expense  of  six  or  eight  mill- 
ions per  annum.  To  delay  silver  coinage  until  the  commer- 
cial world  is  ready  for  it,  and  have  found  out  the  need  of  it, 
is  the  true  policy,  although  the  Latin  Union  and  the  United 
States,  by  combining  to  coin  at  16,  or  perhaps  16J  and  1, 
might  carry  up  the  bullion  price  high  enough  to  meet  these 
figures. 

But  why  take  up  the  load  which  Germany  was  the  first  to 
throw  off  when  one  hundred  and  fifty  millions  of  treasury 
notes,  redeemable  in  gold,  will  supplement  the  supply  of  gold, 
as  I  have  before  demonstrated,  should  any  supplement  be 
needed  or  supposed  to  be  needed  ? 

The  demonstration  shows  that  bullion  values  of  silver  and 
gold  are  values  of  commodities  reckoned  in  each  other  by 
units  of  weight.  Their  use  as  money,  which  is  paramount 
and  controlling,  determines  the  extent  of  their  use  as  com- 
modities in  arts  and  manufactures ;  but  before  they  can  be 
used  as  money  they  must  be  weighed  and  passed  as  units  of 
valuation,  purchase,  and  payment.  Their  relative  bullion 
valuations  are  the  conditions  precedent  to  using  both  of  them 
for  the  purpose  of  weighing  out  the  money  unit :  whether 
that  unit  be  called  by  a  name  which  indicates  weight  like 
the  pound  or  one  which  does  not  is  immaterial.  The  English 
money  pound  (although  a  pound  is  a  unit  of  weight)  has  now 
no  meaning  as  a  mere  unit  of  weight ;  it  means  a  unit  of 
money.    The  commodity  value  of  gold  and  silver,  and  the 


356 


POLITICAL  ECONOMY. 


commodity  mode  of  valuing  tliem  by  comparison,  necessarily 
antedates  and  precedes  their  use  as  money.  The  total  mass 
of  both  silver  and  gold  existing  in  coin  everywhere ;  the  total 
annual  product,  which  is  small  compared  with  that  mass  ;  the 
total  annual  increase  of  commerce,  which  determines  the  addi- 
tional number  of  units  of  the  old  standard  required  to  make 
the  annual  additional  exchanges  required  by  that  increase  ; 
the  loss  in  purchasing  power  of  gold  and  silver  money  by 
the  annual  extension  of  the  use  of  perfectly  convertible,  im- 
perfectly convertible,  and  inconvertible  bank  and  government 
notes ;  and  the  artificial  expansion  of  the  circulation  of  the 
total  of  gold  and  silver  money  through  deposit  and  discount 
banking,  —  reducing  as  it  does  the  total  mass  required  to 
effect  the  actual  exchanges  in  any  given  city,  town,  place,  or 
nation,  while  at  the  same  time  increasing  the  total  exchanges 
of  money  by  adding  to  those  actual  exchanges,  which  dis- 
tribute commodities  through  real  commerce,  exchanges  of 
money  for  labor  and  raw  material,  in  excess  of  the  former, 
equal  to  the  total  of  bank  debt,  —  are  the  principal  causes 
which  determine  the  total  quantity  of  annual  metallic  prod- 
uct of  silver  and  gold  going  into  arts  and  manufactures,  by 
making  it  cheaper  or  dearer  relatively  to  other  commodities. 
The  variations  in  annual  product  between  the  two  metals 
determine  to  a  considerable  extent  the  relative  quantities  of 
such  metal  thus  annually  disposed  of. 

After  the  termination  of  the  late  civil  war  in  the  United 
States,  when  the  premium  on  gold  and  silver  coin  stood  at 
fifteen,  although  its  purchasing  power  as  money  had  fallen 
since  the  commencement  of  the  war  to  the  amount  of  more 
than  forty  per  cent.,  the  metal  contained  in  coin  was  worth 
more  to  manufacture,  as  a  commodity,  into  plate  and  other 
articles,  up  to  the  extent  of  the  demand,  than  into  units 
of  money  which  had  but  fifteen  per  cent,  higher  purchasing 
power  than  legal  tender  and  bank  notes.  The  exchange- 
able value  of  the  metal  in  the  shape  of  a  unit  dollar  was 
no  more  than  that  of  a  unit  legal  tender  or  bank  note,  and 
the  value  of  the  unit  thus  controlled  the  value  of  the  metal. 
That  the  metal  in  the  unit  gave  the  unit  itself  a  premium 


BULLION  VALUES:  MONEY  VALUES.  357 


of  15,  arose  from  peculiar  local  as  well  as  ordinary  external 
considerations.  In  France  the  average  premium  was  small 
under  large  issues  of  inconvertible  bank-notes.  In  the 
United  States  the  metallic  commodity  in  the  coin  lost  com- 
modity value,  as  compared  with  other  commodities,  in  pro- 
portion to  the  loss  of  purchasing  power  of  its  units  through 
the  enormous  increase,  compared  with  the  period  immedi- 
ately antedating  the  war,  of  all  paper  money  units,  which 
continued  to  have  the  same  power  to  pay  debts  as  gold. 
The  loss  of  purchasing  power  of  all  the  units,  both  paper 
and  metallic,  amounted  to  seventy-five  per  cent.,  through 
the  increased  circulation  always  given  through  deposit  and 
discount  banking  to  any  total,  either  of  metal  or  notes,  over 
and  above  what  it  could  have  been  without  deposit  and  dis- 
count banking. 

The  demonetization  of  either  metal,  according  to  the  ex- 
tent of  it,  depreciates  the  commodity  value  of  that  metal 
directly  ;  its  unit  value  in  the  shape  of  coin,  indirectly  and 
ultimately.  The  late  arrest  of  free  coinage  of  silver  by  Ger- 
many, and  afterwards,  by  way  of  defense,  by  the  nations  of 
the  Latin  Union,  has  depreciated  the  commodity  value  of 
silver.  The  depreciation  is  governed  by  the  total  of  addi- 
tional amounts  of  silver  bullion  thrown  upon  the  markets  in 
consequence  by  the  demonetizing  governments  ;  by  the  con- 
sequent loss  of  demand  on  future  production  by  those  gov- 
ernments ;  by  the  quantities  taken  out  of  market  to  send  in 
the  shape  of  bullion  or  coin  to  the  East ;  by  the  increased 
quantities  going  into  manufacture  through  cheapening  of 
commodity  value ;  and  by  the  necessary  decrease  of  pro- 
duction in  consequence.  All  these  complex  elements  deter- 
mine the  total  amount  of  gold  and  silver  bullion,  and  the 
relative  amounts  of  each  kind  of  bullion,  going  into  arts  and 
manufactures.  If  gold  and  silver  were  material  for  money, 
alike  everywhere,  these  elements  would  produce  a  harmo- 
nious result  by  mutual  action  and  reaction,  and  maintain  on 
the  average  equal  amounts  in  value  of  each  metal  in  the 
shape  of  coin,  and  therefore  in  a  state  of  manufactured  com- 
modity.   The  total  amount  of  each  metal  left  after  supply- 


358 


POLITICAL  ECONOMY. 


ing  the  demand  for  manufactured  commodity  would  neces- 
sarily be  to  the  other,  in  point  of  commodity  value,  inversely 
as  the  weights  of  the  respective  masses  left ;  that  is  to  say, 
each  would  be  exactly  equal  to  the  other.  If  one  increases 
or  diminishes  in  mass  in  respect  to  the  other,  its  total  value 
is  nevertheless  not  changed  in  the  slightest  :  the  total  of 
each  still  continues  to  be  one  half  of  the  total  of  both,  be- 
cause purchasing  power  as  a  whole  cannot  be  changed  by 
change  of  quantities  in  the  material  which  limits  the  whole  < 
number  of  units. 

There  is  no  other  mode  of  valuation  possible  for  the  pur- 
pose of  determining  the  barter  values  of  the  materials  used 
as  coin  in  exchange.  As  either  metal  goes  into  manufact- 
ured commodity,  however,  the  comparison  between  the  two 
metals  and  the  resulting  valuation  is  complex,  including  not 
only  relative  quantities  by  weight,  but  relative  use.  If  the 
product  of  silver  averages  forty  pounds  to  one  pound  of  gold, 
were  neither  metal  of  any  use  for  manufacture  other  than 
money,  values  would  be  alike,  pound  for  pound,  even  after 
deducting  for  relative  increase  of  waste  and  loss  in  silver 
over  gold  through  its  larger  relative  mass.  As  this  is  not 
the  case,  however,  and  both  metals  are  highly  useful  for  such 
manufacture,  the  cheapness  of  silver  as  commodity,  compared 
with  gold  as  commodity,  in  excess  of  relative  utility  of  gold 
for  purposes  other  than  those  of  money,  carries  relatively 
more  of  it  than  of  gold  to  that  use.  This,  and  the  greater 
relative  waste  and  loss  of  silver,  have  brought  the  ratio  of 
value  between  the  two  metals,  under  the  almost  general  use 
of  silver  as  money,  to  15^  and  1.  This  has  been  the  simple 
ratio  of  weights  of  respective  masses  going  into  coin,  these 
masses  being  the  residuum  remaining  after  the  exhaustion  of 
all  the  complex  demands,  working  in  the  complex  ratios  be- 
fore mentioned.  This  simple  ratio,  I  repeat,  results  from 
the  various  complex  elements  determining  the  production  of 
the  whole  quantity  of  both  metals  and  the  relative  quanti- 
ties of  each  metal  going  into  arts  and  manufactures.  Were 
the  United  States  to  limit  the  total  coinage  of  silver  at  16 
(\k>\  would  be  better)  to  such  a  quantity  as  would  still  retain 


BULLION  VALUES:  MONEY  VALUES. 


359 


a  large  amount  of  gold  sufficient  to  make  all  public  and  pri- 
vate remittances  abroad  which  might  be  needed,  and  suffi- 
cient to  keep  an  amount  of  gold  at  home  equal  to  all  calls, 
there  could  be  no  objection.  They  might  issue  at  a  very- 
useless  expense  one  hundred  and  fifty,  and  possibly  two  hun- 
dred millions,  which  would  not,  as  before  stated,  be  as  good 
as  so  many  treasury  notes.  This  would  be  equivalent  to  a 
like  amount  of  newly  mined  gold  in  depreciating  the  unit 
dollar  by  increasing  the  number  of  units.  But  this  is  in 
effect  only  what  England  has  done,  and  what  the  United 
States,  Italy,  Austria,  and  Russia  have  done.  They  have 
depreciated  gold  in  purchasing  power  everywhere  ;  but  the 
result,  though  certain,  was  intangible.  Wheriein,  then,  lies 
the  wrong  in  free  remonetization  of  silver  at  16  and  1  ? 
The  relative  purchasing  power  of  silver,  without  treasury 
notes,  in  the  United  States,  at  16  and  1,  will  probably  be 
higher  than  that  of  gold  with  one  hundred  and  fifty  millions 
of  outstanding  treasury  notes.  The  notes  cause  a  general 
depreciation  of  all  metallic  money  everywhere  by  an  expan- 
sion of  the  units  of  money  in  point  of  number,  as  against 
existing  creditors  and  existing  money-holders  everywhere. 
But  this  is  only  what  the  United  States  have  already  done 
to  an  enormously  greater  extent  by  their  issues  of  incon- 
vertible notes.  The  question,  therefore,  is  very  far  from 
being  one  of  inflation  or  expansion  of  prices,  or  contraction 
of  prices.  The  United  States  would  nominally  retain  gold, 
but  would  practically  demonetize  it  by  sending  it  all  abroad 
through  undervaluation  of  its  relative  exchangeable  value  as 
metallic  commodity  compared  with  silver  bullion  as  metal- 
lic commodity.  Being  bound  to  maintain  the  purchasing 
power  of  both  its  metallic  units  in  all  markets  where  it  pays 
debts,  it  must  make  the  least  valuable  equal  to  the  most 
valuable.  The  practical  result  would  be  a  metallic  or  barter 
premium  of  exchange,  amounting  sometimes  to  more  and 
sometimes  to  less  than  three  per  cent.,  if  silver  bullion  rose 
in  consequence  of  free  remonetization  at  16,  to  16^  in  Lon- 
don. This  premium  would  be  paid  out  of  the  external  com- 
merce, falling  back  on  the  production  of  the  United  States. 


360 


POLITICAL  ECONOMY. 


It  would  be  paid  to  exported  produce,  to  be  charged  back  in 
part  to  and  paid  by  produce  not  exported,  producing  great 
inconvenience,  and  perhaps  a  domestic  exaction  of  a  premium 
when  not  warranted  ;  a  loss  of  debtors  first,  followed  by  a 
partial  distribution  of  the  loss.  It  might  be  thought  better 
to  follow  up  the  resulting  indirect  demonetization  of  gold 
by  a  formal  and  legal  one.  But  the  same  rate  of  exchange 
would  continue  after  all  the  American  gold  had  ceased  to 
exist  as  coin,  and  there  would  be  the  same  nominal  differ- 
ence between  the  unit  of  gold  and  silver,  although  the  unit 
of  gold  could  no  longer  be  found  actually  in  existence. 

To  reduce  the  purchasing  power  of  their  metallic  units  by 
the  issue  of  paper  in  the  home  market  is  an  act  for  which 
there  is  no  mode  of  holding  governments  directly  liable. 
The  people  suffer  together  from  the  resulting  loss,  and  cred- 
itors most ;  yet  public  necessity  may  demand  it.  But  gov- 
ernments are  required  to  maintain,  in  behalf  of  creditors, 
the  purchasing  power  of  all  their  metallic  units  of  the  same 
name  on  a  par  in  the  markets  of  the  commercial  world,  for 
there  creditors  may  be  found.  The  whole  liability  of  gov- 
ernments may  be  summed  up  in  a  few  words.  If  all  govern- 
ments were  to  monetize  both  silver  and  gold  freely,  making 
all  their  coins  of  either  metal  of  equal  weights,  and  giving 
them  the  same  name,  they  would  be  units  of  equal  value, 
and  therefore  equal  purchasing  and  paying  power  every- 
where, and  there  would  be  no  nominal  difference  of  exchange 
to  settle  so  long  as  this  plan  continued.  But  so  long  as  gov- 
ernments continue  to  coin  units  of  different  weights,  and  to 
monetize  and  demonetize,  and  change  the  weights  of  their 
units  at  pleasure,  a  nominal  rate  of  barter  exchange  between 
the  respective  quantities  of  bullion  in  their  different  units 
must  result ;  and  should  the  United  States  monetize  silver 
freely  at  the  ratio  of  16  and  1,  and  come  short,  by  one  half 
pound  of  silver  for  every  sixteen  coined,  of  hitting  the  rate 
of  barter  exchange  between  the  two  metals  in  London,  this 
would  create  an  artificial  premium  to  be  settled  between  the 
bullion  in  the  silver  dollar  and  the  bullion  in  the  gold  dol- 
lar of  three  units  out  of  every  one  hundred  units  of  weight 


BULLION  VALUES:  MONEY  VALUES. 


361 


of  silver.  This  is  the  barter  exchange  between  the  com- 
modities —  between  the  buUion  in  the  gold  dollar  and  the 
bullion  in  the  silver  dollar.  This  rate  of  exchange  between 
the  metals  as  commodities  to  furnish  material  for  the  money- 
unit  antedates  the  actual  use  of  the  coin  as  money,  and  is 
absolutely  necessary  before  the  two  can  be  used  in  foreign 
markets  as  money  at  all.  The  barter  exchange  between 
metals  coined  must  be  settled  before  the  coins  can  be  re- 
ceived. After  the  barter  rate  is  fixed  the  exchange  takes 
place,  and  not  before.  What  the  actual  exchangeable  value 
of  any  coined  metals  shall  be,  when  they  are  used  as  money, 
and  not  bartered  as  commodities,  is  a  matter  of  average  as 
a  whole,  made  up  of  the  millions  of  different  purchases  made 
with  them  all  over  the  world.  Sometimes  the  local  average 
may  be  reduced  more  than  fift}^  per  cent,  by  issues  of  irre- 
deemable notes,  as  by  the  United  States  after  the  commence- 
ment of  the  late  civil  war.  This  is  merely  a  local  loss  of 
purchasing  power  in  the  gold  or  silver  coin,  which  must  be 
carefully  distinguished  from  the  barter  exchange  value  of 
the  material  of  which  the  coins  are  made.  Upon  this  prin- 
ciple, if  the  United  States  had,  prior  to  the  late  civil  war, 
placed  the  commodity  or  bullion  value  of  silver  relatively 
higher  than  that  of  gold,  instead  of  making  it,  as  they  did, 
relatively  lower  than  that  of  gold,  the  gold  would  have  left, 
and  silver  w^ould  have  been  the  only  metallic  money,  and 
practically  what  is  called  "  standard  "  in  the  United  States, 
instead  of  gold.  The  public  debt  of  the  United  States  would 
then  have  been  payable  in  silver  as  distinguished  from  gold, 
it  might  be  supposed,  as  it  now  is  supposed  to  be  (where 
nothing  is  expressed  to  the  contrary,  either  in  the  law  or  the 
bond)  payable  in  gold  as  distinguished  from  silver.  But 
were  that  so,  could  the  United  States  have  paid  off  the  for- 
eign as  well  as  domestic  holders  of  their  debt  at  the  old 
silver  bullion  rates  at  which  they  had  coined  their  silver, 
notwithstanding  the  fact  of  the  loss  in  barter  exchange  be- 
tween silver  bullion  and  gold  bullion,  on  the  part  of  silver 
in  London,  of  ten  to  fifteen  per  cent,  upon  any  just  consid- 
eration of  the  law  of  nations  ? 


862 


POLITICAL  ECONOMY. 


Could  the  United  States,  in  that  case,  have  called  upon 
their  creditors  to  bear  any  loss  resulting  from  the  acts  of 
Germany  and  the  nations  of  the  Latin  Union  in  respect 
to  silver,  or  would  they  be  bound  to  bear  the  loss  them- 
selves ?  The  principle  is  discussed  in  the  chapter  on  the 
Redemption  of  Currency,  but  the  answer  must  be,  unques- 
tionably, that  the  United  States  ought  to  stand  by  its  implied 
guaranty  and  pledge,  arising  out  of  all  the  equities  of  the 
case,  to  make  good  the  loss.  If  that  be  so,  the  objection  to 
the  remonetization  of  silver  by  the  United  States  is  not  in 
the  fact  of  monetization,  but  to  any  monetization  which 
throws  upon  the  public  creditor  and  the  private  creditor  in 
the  commercial  world's  markets  the  loss  resulting  from  the 
necessity  of  paying  a  barter  exchange  between  the  two  me- 
tallic commodities  used  as  money  in  the  commercial  world's 
markets.  If  the  United  States  had  never  coined  an  ounce 
of  gold,  and  no  metal  but  silver,  the  loss  to  silver  bullion 
resulting  from  the  acts  of  Germany  and  the  Latin  Union 
would  then  require  the  former,  in  paying  silver  to  creditors, 
to  compare  bullion  rates  between  gold  and  silver,  before 
those  acts  and  since,  and  to  pay  the  resulting  barter  differ- 
ence, thus  maintaining  their  implied  pledge  and  guaranty. 
They  could,  as  they  did,  depreciate  the  purchasing  power  of 
their  gold  and  silver  units  forty  per  cent,  at  home  by  the 
issue  of  inconvertible  legal  tender  notes,  send  abroad  in 
consequence  a  large  portion  of  their  gold,  and  even  silver, 
and  the  greater  portion  of  their  annual  average  of  metal 
going  into  the  mint  for  coinage,  for  more  than  fifteen  years, 
depreciating  the  purchasing  power  of  all  metallic  money  in 
all  markets  in  consequence ;  but  they  cannot,  without  an 
indemnity  to  the  losers,  pay  their  debts  in  the  commercial 
world's  markets,  where  their  paper  debt  will  not  pay,  with- 
out paying  the  barter  exchange  rates  between  the  metal  in 
the  coin  they  offer  and  the  metal  in  the  coin  used  by  their 
creditors.  In  the  commercial  world's  markets  they  could 
not,  even  if  there  were  no  money  in  the  world  but  silver, 
reduce  the  quantity  of  silver  in  their'  unit  dollar  to  the 
prejudice  of  creditors,  and  they  are  bound  to  maintain  in  all 


BULLION  VALUES;  MONEY  VALUES.  363 


markets  the  barter  rate  of  the  silver  in  their  silver  unit. 
They  must  pay  the  rate  of  barter  exchange  between  the 
quantity  of  silver  in  their  unit  since  the  reduction  as  com- 
pared with  gold,  if  they  pay  with  silver  units. 

But  the  case  is  not  perfectly  clear  yet,  without  calling  in 
aid  principles  established  in  another  chapter,  but  not  practi- 
cally illustrated.  Why  is  it  impossible  to  establish  any  other 
relation  but  that  of  barter  exchange  by  units  of  weight  be- 
tween gold  and  silver  carried  to  the  mint  for  coinage  ?  Be- 
cause in  actual  exchanges  of  all  kinds,  whether  by  barter 
or  through  units  of  complex  valuation  by  civilized  or  savage 
men,  a  comparison  of  some  kind  must  be  made  to  enable 
the  exchange  to  take  place.  If  an  ounce  of  silver  (sup- 
posing the  dollar  to  contain  an  ounce)  were  really  bartered 
for  sixty  pounds  of  wheat,  when  a  dollar  is  paid  for  it,  as  all 
writers  on  exchange  affirm,  the  comparison  must  always  be 
between  all  the  uses  to  which  the  silver  can  be  put  and  all 
the  uses  to  which  the  wheat  can  be  put.  This  comparison 
can  be  easily  made  between  these  two  commodities  and  their 
respective  weights,  because  there  can  be  a  comparison  of 
uses  :  all  this  is  entirely  practicable,  because  there  is  a  pos- 
sibility of  comparison.  But  when  it  comes  to  establishing  a 
comparison  for  purposes  of  exchange  between  gold  or  silver 
and  everything  else  ready  for  exchange  in  the  world,  this 
universal  exchange  can  only  take  place  by  comparing  all 
these  things  on  the  one  hand,  and  gold  and  silver  on  the 
other  hand,  by  those  qualities  which  all  possess,  and  that  is 
divisibility  into  units.  These  units  are  necessarily  abstract 
and  ideal,  because  their  relations  can  be  mentally  perceived 
in  the  abstract  only.  But  the  units  of  metal  are  limited  by 
the  commodity  which  contains  them,  and  so  with  all  the  com- 
modities exchanged.  The  units  of  money,  however,  being 
thus  limited  and  abstract,  continue  so  in  their  capacity  of 
valuing,  purchasing,  and  paying  units ;  but  the  commodities 
going  into  actual  use  are  apportioned  according  to  the  action 
and  reaction  of  demand  and  supply  by  the  purchaser.  His 
units  of  purchase  are  limited,  and  must  be  apportioned  to 
each  commodity  according  to  his  wants.    It  is  not  the  units 


364 


POLITICAL  ECONOMY. 


of  money  which  control  the  buyer's  actions,  but  his  actions 
which  control  the  apportionment  of  the  units  to  different  ob- 
jects, as  may  suit  his  purposes.  Hence  the  money  unit  con- 
tinues a  mere  unit,  because  that  is  the  only  relation  possible 
to  be  conceived  between  it  and  the  units  of  all  other  com- 
modities ;  but  the  units  of  commodities  are  continually  made 
practical  realities  through  continual  use.  If  they  were  only 
used  to  exchange  for  money,  as  money  is  universally  used  to 
exchange  for  them,  and  for  no  other  purpose,  the  exchanges 
as  a  whole  could  only  be  conceived  of  as  units  constantly 
being  exchanged  for  each  other.  This  explains  why  prices 
of  bullion  as  a  commodity  do  not  determine  purchasing 
power  of  bullion  as  units  of  money,  or  the  purchasing  power 
of  convertible  or  inconvertible  bank  or  government  debt, 
whatever  form  they  may  assume  directly ;  but  only  in- 
directly, as,  after  longer  or  shorter  time  has  elapsed,  the 
changes  in  the  rates  of  barter  exchange  between  the  metals 
may  here,  there,  or  everywhere  increase  the  number  of 
money  units  which  the  forces  existing  in  human  power  and 
will  may  put  in  circulation.  The  barter  exchange  between 
metals,  being  stated  with  mathematical  exactness,  can  be 
made  with  equal  exactness ;  but  the  exchange  between  the 
metals  and  all  other  commodities  is  made  up  of  a  series  of 
exchanges  practically  infinite.  If  all  the  exchanges  of  each 
commodity  for  a  definite  period  could  be  obtained,  and  an 
average  struck  between  them,  it  would  give  the  average 
exchangeable  value  of  that  commodity.  The  first  rate  of 
exchange  is  easily  ascertained,  the  second  cannot  be. 

The  United  States,  by  maintaining  a  circulation  of  one 
hundred  and  fifty  millions  of  legal  tenders,  can  cause  a 
greater  expansion  of  units  of  dollars,  and  therefore  of  all 
money,  than  by  free  coinage  of  silver  at  16.  There  would 
be  in  the  latter  case  a  large  influx  of  silver,  and  for  a  time 
local  excess  of  it,  but  ultimately  what  is  called  "contrac- 
tion "  would  be  greater  under  the  silver  than  under  the  legal 
tender  notes.  From  this  theory  of  bullion  values  and  money 
values  thus  developed  by  analysis,  the  remarks  in  the  second 
chapter  upon  the  common  theory  as  to  the  manner  in  which 


BULLION  VALUES:  MONEY  VALUES. 


365 


banking  reserve  ought  to  be  kept  —  that  it  should  vary  as 
bank  debt  varies,  instead  of  forcing  bank  debt  to  vary  with 
itself,  and  also  upon  the  theory  of  those  who  urge  the  aban- 
donment of  metal  altogether,  and  the  issue  of  inconvertible 
notes  by  government,  are  fully  sustained.  If  bank  reserve, 
although  gold,  varies,  as  it  may  be  made  to  vary  by  bank 
managers,  there  is  no  metallic  limitation  to  the  units  of  bank 
debt,  which  are  used  by  depositors  to  move  the  units  of  gold 
in  the  reserve  :  if  government  can  issue  inconvertible  notes 
at  pleasure,  there  is  the  same  want  of  limitation.  It  is  a 
question  of  the  extent  only  of  maximum  and  minimum  vari- 
ation in  prices,  and  the  figures  of  average  prices ;  the  units  of 
money  being  moved  in  the  reserve  in  the  same  way  in  both 
cases.  Tlie  only  limitation  of  expansion  in  either  case  is  a 
commercial  crisis,  because  it  is  the  only  limitation  possible, 
as  was  seen  in  1857  under  convertible,  and  in  1873  under  in- 
convertible, currency.  It  is  impossible  to  understand  this 
last  proposition  without  keeping  fully  in  view  the  difference 
between  bullion  values  and  money  values.  Gold  and  silver 
in  the  reserve  are  not  bullion,  because  they  are  not  metallic 
commodity,  but  money.  They  count  units  only  with  the 
units  of  bank  debt.  Ten  pounds  or  dollars  in  gold  and  sil- 
ver in  the  reserve  are  worth  no  more,  and  count  no  more, 
than  ten  pounds  or  dollars  in  the  shape  of  debt  due  from  the 
bank  over  and  above  reserve,  or,  in  other  words,  the  credit 
held  by  depositors  over  and  above  reserve.  It  is  impossible 
to  distinguish  the  one  from  the  other  in  the  reserve :  all  the 
units  are  owned  indiscriminately,  without  distinction  be- 
tween them,  by  depositors,  according  to  the  state  of  their 
several  accounts.  To  allow  the  debt  units  to  vary  by  means 
of  unlimited  loans,  progressively  in  advance  of  the  metallic 
units,  is  to  make  the  reserve  vary  as  bank  debt  varies  :  it  is 
to  make  gold  in  the  reserve  vary,  not  as  gold  varies  in 
France  according  to  actual  commerce,  which  is  the  actual 
exchange  of  gold  for  commodities  only,  but  as  bank  debt 
varies,  or,  looking,  as  we  ought,  at  results,  as  production,  in- 
creasing with  bank  debt,  varies.  On  the  other  hand,  to  make 
bank  debt  vary  as  gold  varies  in  the  reserve,  is  to  make  it 


366 


POLITICAL  ECONOMY. 


vary  as  gold  varies  in  France,  or,  in  other  words,  with  actual 
commerce,  and  not  the  production  which,  by  feeding  it  with- 
out limitation,  is  allowed  to  proceed  on  to  overproduction. 
National  coins,  outside  of  the  nation,  are  bartered  or  com- 
pared as  bullion  with  the  bullion  in  the  coins  of  the  nation 
whither  they  may  be  sent.  If  silver  were  alone  material  for 
coin,  the  barter  valuation  would  be  weight  against  weight : 
gold  and  silver  being  used,  it  is  weight  against  weight,  minus 
or  plus  the  units  to  be  deducted  or  added.  Here^  money 
as  bullion  is  commodity ;  there^  in  the  reserve  it  is  a  series 
of  units. 


CHAPTER  XVL 


OF  LABOR  AS  A  MASUKE  OF  VALUE :  DIVISION  OF  LABOR, 
AND  ITS  INCREASING  EFFICIENCY. 

That  labor  is  not  the  measure  of  values,  either  generally 
or  particularly,  is  a  corollary  necessarily  resulting  from  the 
propositions  already  established.  It  is  not  true  as  a  cause, 
nor  is  it  true  in  any  just  sense  as  an  effect.  The  idea  that 
it  is  a  measure  of  values  as  a  cause,  as  expounded  by  Adam 
Smith  and  others,  must  have  occurred  through  the  logical 
necessity  of  finding  some  method  of  valuing  in  order  to 
exchange  commodities ;  for  in  what  way  could  labor  be  a 
measure  but  by  the  use  of  units  of  labor,  either  as  furnish- 
ing units  of  time  during  which  the  labor  lasted  or  units  of 
results  in  the  shape  of  commodities.  The  unit  of  time  could 
only  be  used  upon  the  express  or  implied  assumption  that  it 
would  produce  on  the  average  results  of  equal  value,  so  that 
after  all  we  must  eliminate  the  unit  of  time  and  look  only 
to  the  unit  of  results.  Thus  we  are  carried  back  to  the  old 
valuation  of  commodities  by  units,  or  African  macoutes,  in 
which  all  the  complex  considerations  of  comparative  utility 
and  quantity,  as  estimated  by  the  actors  in  all  exchanges,  are 
to  be  considered.  It  is  impossible,  therefore,  that  labor  can 
be  a  measure  except  in  its  results,  as  estimated  by  those  who 
exchange.  This  makes  the  abstract  and  ideal  unit  of  valua- 
tion by  commodities  a  necessity,  and  the  localization  and 
limitation  of  the  unit  a  necessary  result  in  the  progress  of 
human  development,  as  stated  in  the  first  chapter  of  this 
work.  Values  are  determined  by  the  action  and  reaction  of 
demand  and  supply ;  demand  including  not  only  the  desire 
founded  on  the  want,  whether  natural,  or  more  or  less  arti- 


368 


POLITICAL  ECONOMY. 


ficial,  but  the  ability  to  supply  it  by  having  something  to 
give  in  exchange  for  that  which  v^ill  satisfy  it. 

If  the  abstract  doctrine  or  proposition  of  M.  J.  B.  Say  and 
his  followers  were  practically  true,  the  result  would  be  per- 
fect harmony  of  production  :  there  might  be  too  little  of  any 
one  article  produced  at  times  relatively  to  others,  but  there 
never  could  be  too  much.  But  the  production,  commerce, 
and  business  of  the  whole  commercial  world  are  not  a  mere 
abstraction  to  be  considered  without  any  reference  to  the 
actors  who  are  the  cause  of  them.  The  commercial  world  is 
not  a  huge  machine  with  a  balance  wheel,  to  be  regarded 
solely  by  itself  :  the  movements  in  it  are  not  mere  matters 
of  machinery,  but  of  persons  who  differ  greatly  from  ordi- 
nary machinery.  The  foundation  of  all  commerce  is  to 
supply  human  wants  according  to  the  scale  of  development 
attained  and  attainable.  Men  must  have  the  absolute  nec- 
essaries of  life  as  the  inexorable  condition  precedent  of  their 
obtaining  those  which  result  from  civilization  :  the  former 
vary  in  kind  and  amount  comparatively  little  ;  the  other 
may  vary  much.  The  former,  as  already  shown,  cannot  be 
overproduced  ;  the  latter  may  be  through  the  increased  and 
constantly  increasing  division  of  labor,  but  much  more  by  its 
constantly  increasing  efficiency. 

But  if  the  latter  can  be  increased  in  this  manner  to  such 
an  extent  as  to  produce  relative  excess  on  the  part  of  all  of 
them,  how  can  the  producers  exchange  with  each  other, 
maintain  commerce,  and  supply  all  their  wants  ?  They  can- 
not they  must  exchange  with  the  producer  of  absolute  nec- 
essaries first  of  all,  and  then  they  can  exchange  with  each 
other  and  proceed  in  their  production,  subject  always  to  this 
condition.  What  is  absolute  must  control  what  is  relative. 
In  this  manner  the  action  and  reaction  of  supply  and  de- 
mand will,  if  nothing  artificially  disturbs  it,  maintain  an 
equilibrium  of  production,  no  matter  how  complete  the  di- 
vision of  the  labor  which  supplies  relative  necessaries,  or  how 
extensive  the  improvements  in  machinery  and  processes  de- 
voted to  that  purpose.  If  it  were  not  so  this  division  of 
labor  and  these  improvements  would  become  a  greater  and 


OF  LABOR  AS  A  MEASURE  OF  VALUE. 


369 


greater  curse  to  the  human  race  as  they  proceed ;  whereas 
the  contrary  would  seem  to  be  the  fact,  from  the  results 
they  have  hitherto  produced  on  the  whole,  with  the  excep- 
tion of  the  continual  disturbances  in  production,  labor,  and 
commerce. 

If  these  are  the  results  of  the  increased  and  increasing 
division  of  labor,  and  its  efl&ciency,  through  the  causes  before 
mentioned,  it  is  a  matter  of  grave  doubt,  whether  they  are 
not,  in  point  of  fact,  to  be  deplored,  as  producing  more  suf- 
fering than  comfort.  One  thing  is  certain,  that  if  it  be  so  a 
large  number  of  the  laborers  must  be  sent  back  to  the  plow, 
because  they  can  be  spared ;  and  could  the  surplus  hereto- 
fore employed  in  the  production  of  relative  be  at  once  com- 
fortably settled  in  the  production  of  absolute  necessaries,  this 
would  be  the  remedy.  But  the  true  remedy  is,  to  allow  the 
natural  forces  of  supply  and  demand  to  always  keep  the  right 
number  at  the  plow,  instead  of  first  taking  them  away  and 
afterwards  sending  them  back. 

This  remedy,  so  far  as  attainable,  has  already  been  stated. 
The  mischief  lies  in  the  use  of  credit  —  not  ordinary  mer- 
cantile credit,  which  would  only  carry  up  the  price  of  those 
necessaries  of  life  bought  on  credit  to  sustain  the  producer 
of  relative  necessaries  while  producing  his  overstock,  but  a 
kind  of  credit  which,  while  raising  the  price  of  the  absolute 
necessaries  in  the  shape  of  grain,  provisions,  etc.,  very  much, 
also  raises  the  price  of  the  relative  necessaries  sold,  in  spite 
of  the  natural  tendency  of  all  overstock  to  fall.  This  opera- 
tion is  performed,  and  can  by  no  possibility  be  performed 
otherwise  than  by  money,  through  its  increased  circulation 
by  means  of  loans.  That  excess  in  the  production  of  the 
relative  necessaries  does  periodically  appear  is  now  unques- 
tioned and  unquestionable.  Relative  excess  is  followed  un- 
avoidably by  relative  defect.  The  reality  existing  under 
the  veil  of  money  is  borrowing  by  one  set  of  producers  of 
another  set  to  support  themselves,  while  producing  overstock 
in  the  guise  of  a  loan  of  money.  This  real  result  is  what  is 
found  to  be  the  fact,  after  the  crisis  comes,  whether  the  money 
has  been  borrowed  in  bank-notes  (whether  convertible  or  in- 

24 


370 


POLITICAL  ECONOMY. 


convertible)  or  in  gold  or  silver,  because  all  are  as  money 
units  of  valuation,  purchase,  and  payment,  and  not  mercan- 
tile commodity.  All  this  results  in  a  borrowing  on  pro- 
ducers' and  merchants'  credit,  guarantied  by  the  bankers 
who  deal  in  the  extra  circulation  of  money,  and  it  amounts 
in  its  effects  to  a  guaranty  of  the  producers  and  merchants 
in  the  final  exchanges  of  commodities.  The  constant  vari- 
ation of  prices  which  follows  is  a  practical  demonstration  of 
itself  that  labor  is  not  the  measure  of  values. 

It  is  high  time  to  have  a  real  science  of  production  and 
exchange  founded  on  facts,  and  not  on  abstract  theories, 
which  are  only  remotely  and  subjectively  true.  If  mer- 
chants, bankers,  manufacturers,  and  intelligent  and  skilled 
laborers,  have  not  yet  found  out  the  fact  that  all  men  who 
have  farms  of  average  size  and  productiveness,  with  average 
management,  are  reasonably  sure  of  a  living,  while  they 
themselves  are  not,  it  is  useless  to  try  to  convince  them,  and 
yet  the  science  still  taught  is  that  there  can  be  no  over- 
production, agi-eeably  to  M.  Say's  argument.  If  none  but 
ordinary  credit  were  in  use  ;  if  the  credit  banks  deal  in 
were  really  the  sale  of  a  direct  guaranty  of  loans  of  absolute 
necessaries,  the  pledge  given  them  being  overstock  and  cap- 
ital behind  it,  all  this  sort  of  science  would  be  harmless.  It 
would  still  be  false,  but  the  rectification  of  any  line  of  over- 
production within  short  periods,  by  the  base  line  of  agricult- 
ural production,  would  approximate  to  that  perfect  harmony 
of  production  which  they  teach.  But  because  what  thej'- 
call  ordinary  credit  is  really  the  selling  by  banks,  not  of  a 
direct  but  indirect  guaranty  by  means  of  the  use  of  depos- 
itors' money  in  the  reserve,  to  cause  this  very  overproduc- 
tion, which  is  concealed  by  the  expansion  of  circulation,  and 
consequently  of  general  prices,  until  the  overstock  breaks 
down  and  is  forced  upon  the  market,  the  abstract  theory  is 
pernicious  in  its  effects,  because  it  hinders  the  investigation 
and  application  of  remedies.  It  is  not  to  be  supposed  that 
any  perfect  remedy  can  be  applied.  National  habits  will 
break  out  in  spite  of  attempted  remedies,  but  a  mitigation  is 
undoubtedly  practicable. 


CHAPTER  XVII. 


BANK-NOTE-KEDElklPTION  RESERVE  AND  BANKING  RE- 
SERVE ;  THEIR  RATIO  TO  BANK  DEBT,  AND  THE  PROPER 
PLACE  OF  KEEPING  THE  RESERVE  OF  EACH  KIND. 

Banking  Reserve  is  a  misnomer,  because  it  implies  that 
banks  do  not  use  their  reserve  except  occasionally ;  whereas 
it  has  been  demonstrated  in  the  foregoing  chapters  that 
both  they  and  their  depositors  use  it  altogether,  because 
they  have  nothing  else  to  use.  The  actual  deposits  of  a 
country,  together  with  all  the  money  in  the  hands  of  money- 
holders,  who  keep  their  own  money,  form  a  series  of  reserves 
constituting  all  the  money  in  the  country,  —  deposits,  aside 
from  and  in  the  absence  of  bank  loans,  differing  from  other 
reserves  in  the  fact  that  they  are,  in  Great  Britain  as  well 
as  in  the  United  States,  a  consolidation  of  one  half,  more  or 
less,  of  all  the  money  reserves  in  each  country  in  point  of 
volume,  in  a  series  of  banks,  —  these  several  consolidations 
being  equivalent  in  effect  to  one  grand  consolidation  in  a 
single  bank  with  branches.  This  consolidation,  after  the  in- 
auguration of  bank  loans,  sustains  all  bank  loans,  and  there- 
fore a  like  amount  of  production  on  credit ;  while,  through 
deposit  and  redeposit,  it  enables  banks,  with  a  varying  re- 
serve, to  put  in  circulation,  as  the  agents  of  depositors,  and 
chiefly  through  the  instrumentality  of  checks,  precisely  as 
much  money  as  if  there  were  a  dollar  or  pound  of  metal  for 
every  dollar  or  pound  in  the  shape  of  what  are  called  depos- 
its, plus  the  total  of  bank  debt  over  and  above  reserve.^ 

1  A  deposit  total  of  100  millions  of  pounds,  with  25  per  cent,  of  reserve  is 
equal  to  100  millions  —  25  millions -j-  100  millions  =175  millions  of  pounds  in 
the  hands  of  holders,  in  productive  eflSciency.  The  25  millions  are  erroneously- 
called  reserve,  and  this  misnomer  has  done  more  than  anything  else  to  pass  cur- 


372 


POLITICAL  ECONOMY. 


There  is  no  assignable  limit  but  a  crisis  to  the  extent  to 
which  the  total  reserve  may  continue  to  lose  metal,  or  bank- 
notes be  carried  into  and  kept  in  circulation  through  pay- 
ments for  labor,  raw  material,  profits,  interest,  and  charges, 
but  a  crisis.  Therefore  it  is  not  surprising  that  Mr.  Price 
should  ask,  in  his  "  Principles  of  Currency,"  why  so  much 
useless  metal  is  kept  in  the  reserve,  since  it  is  much  more 
than  equal  to  supplying  all  the  calls  upon  it.  I  have  shown 
where  the  real  fault  is,  in  the  chapter  on  Banking  in  Eng- 
land under  the  Bank  Act  of  1844.  It  is  because  the  units 
of  bank  debt,  or  of  depositors'  credit  over  and  above  reserve, 
control  the  units  of  metal,  and  notes  based  on  metal,  in  the 
reserve,  instead  of  the  latter  controlling  the  former.  The 
meaning  of  this,  translated  into  the  proper  language  of  the 
forces  which  control  the  movements  of  all  these  units  of 
money,  is,  that  bank  loans,  aside  and  non-existent,  the  total 
of  deposits  would  be  the  total  of  money  received  by  de- 
positors for  commodities  exchanged  for  consumption.  Intro- 
duce bank  loans,  and  the  volume  of  loans,  to  whatever  extent 
carried,  shows  the  amount  of  money  from  the  reserve  put  in 
circulation  by  the  bank  or  banks,  not  to  exchange  commodi- 
ties for  consumption,  but  to  enable  producers  to  produce 
commodities  to  the  extent  of  the  total  volume  of  loans  in 
excess  of  those  exchanges.   Bank  loans  arose  originally  from 

rent  the  fallacy  that  banks  deal  in  debt.  It  is  not  reserve,  except  in  the  sense 
that  it  is  so  much  out  of  depositors'  money,  which  banks  have  not  used.  It  is 
in  this  case  equal  to  100  millions  of  pounds  in  the  pockets  of  depositors,  because 
it  can  distribute  for  consumption  an  equal  amount  of  commodities.  It  is  equal 
to  100  millions  circulated  into  the  hands  of  its  owners  for  commodities  con- 
sumed, while  the  bank  debt  over  and  above  reserve  is  equal  to  a  total  of  like 
amount  in  metal  and  bank-notes  circulated  into  the  hands  of  holders  for  so 
many  commodities  produced,  but  not  consumed.  All  this  enormous  complex- 
ity of  development  in  the  uses  and  the  effects  of  money  given  an  additional 
circulation  corresponding  to  the  production  of  commodities  through  bank  loans 
over  and  above  the  natural  circulation  which  distributes  them,  arises  from  the 
fact  I  have  demonstrated,  —  that  money  is  not  a  commodity,  but  a  series  of 
units  limited  in  number  by  the  material  of  which  they  are  made,  so  far  as  the 
precious  metals  are  concerned.  If  money  were  a  commodity  in  reality,  no 
such  complexity  could  exist.  The  general  supposition,  that  it  is  a  commodity, 
makes  every  one  believe  that  he  understands  the  laws  of  money,  and  that  they 
are  really  a  very  simple  affair. 


BANK-NOTE-REDEMPTION  RESERVE.  373 


the  deposit  of  metal  or  notes.  Hence,  to  fix  bank  reserve 
in  a  definite  ratio  to  liabilities,  or,  in  other  words,  to  keep 
say  twenty-five  per  cent,  in  reserve,  is  to  fix  the  point  at 
which  the  use  of  the  money  of  depositors  to  produce  on 
credit,  in  excess  of  actual  exchanges  for  consumption,  shall 
stop.  The  twenty-five  per  cent,  in  reserve  always  demon- 
strates that  exactly  seventy-five  per  cent,  of  the  money  of 
depositors  has  been  used  to  sustain  production  on  credit,  in 
excess  of  actual  exchanges,  and  is  equivalent  to  so  much  ad- 
ditional circulation,  while  the  twenty-five  per  cent,  of  money 
causes  the  same  amount  of  exchanges  to  take  place  as  one 
hundred  per  cent,  could  do  if  kept  in  their  own  hands  by 
depositors. 

Bank-notes  issued  by  banks  of  issue,  in  the  absence  of 
banks  of  deposit  and  discount,  and  perfectly  convertible, 
maintain  a  nearly  even  ratio  with  metal,  and  are  therefore 
limited  by  the  metal  and  distributed  with  the  metal  as  in 
Scotland  in  Adam  Smith's  time.  The  banks  which  issue 
them  cannot  maintain  a  circulation  independent  of  that 
given  them  by  their  customers  who  borrow  them.  If  A. 
borrows  ten  thousand  pounds  of  a  bank  of  issue  in  the  ab- 
sence of  all  deposit  and  discount  banking,  he  gives  his  note 
or  bill  for  the  bank-notes  less  discount,  and  pays  the  notes 
out  for  labor  and  raw  material.  If  the  bank  keeps  this 
amount  of  notes  in  circulation  by  loaning  notes  as  fast  as 
it  redeems,  and  no  faster  (and  it  can  do  it  no  faster  with- 
out increasing  reserve  in  proportion),  the  notes,  as  before 
shown,  take  the  place  of  so  much  metal,  and  can  be  and  are 
used,  either  to  exchange  commodities  actually  produced  and 
consumed,  or  to  pay  for  labor  and  raw  material  to  produce 
commodities  to  fill  the  void  created  by  consumption,  as  I 
have  before  shown  to  be  the  case  with  metal  in  the  shape  of 
coin.  They  cannot  be  used  in  the  way  of  loan  by  banks 
to  other  customers,  while  the  borrowers  and  others  to  whom 
they  have  paid  them  out  are  using  them,  either  to  exchange 
commodities,  or  pay  for  labor  and  raw  material.  They  have 
passed  entirely  from  the  control  of  the  banks,  and  remain  in 
other  hands  until  the  banks  are  called  upon  to  redeem  them ; 


374 


POLITICAL  ECONOMY. 


and  then  the  banks  can  only  use  them  or  an  equal  amount 
of  other  notes  by  increasing  their  reserve  to  what  it  was 
before  and  reissuing.  But  establish  deposit  banking,  and 
let  one  half  of  all  the  money  in  the  country  in  the  shape  of 
metal  and  notes  be  deposited,  and  the  banks  can  lock  up 
seventy-five  per  cent,  of  all  the  metal  and  notes  and  make  all 
their  payments  on  depositors'  checks  out  of  the  twenty-five 
per  cent.  This  they  are  enabled  to  do  in  consequence  of  the 
continual  stream  of  deposits  which  balances  that  of  pay- 
ments (the  two  streams  being  on  short  averages  equal), 
while  the  same  number  of  exchanges  of  commodities  and 
payments  for  labor  and  raw  material  by  purchases  in  ordi- 
nary course,  and  through  loans  made  by  depositors  and  all 
other  persons,  takes  place,  as  if  the  seventy-five  per  cent,  of 
metal  and  notes  had  not  been  locked  up.  Hence  there  is, 
in  consequence  of  the  locking  up  merely,  no  expansion  of 
the  circulation  of  money  above  the  natural  volume  arising 
from  the  distribution  of  commodities  for  consumption,  and 
the  supply,  through  production,  of  the  void  created  thereby. 
But  the  banks  can  go  still  farther  in  locking  up  money. 
They  can  make  their  reserve  (the  money  not  locked  up) 
twenty  per  cent,  of  the  whole  volume  of  deposits  to-day, 
twenty-one  per  cent,  to-morrow,  nineteen  per  cent,  the  next 
day,  twenty-two  per  cent,  the  next  day,  and  eighteen  per 
cent,  the  day  following.  They  can  continue  to  vary  the 
reserve  daily,  and  probably  carry  it  as  low  as  fifteen,  per- 
haps ten,  and  possibly  five  per  cent.,  whether  they  loan  or 
not.  They  can  do  this  because  the  money  in  the  reserve 
paid  out  is  continually  made  up  by  money  paid  in.  Prices 
remain  as  steady  as  before,  because  the  same  amount  of  cir- 
culation of  money  goes  on  as  before.  All  this  happens  be- 
cause the  metal,  as  money,  is  a  commodity  of  conventional 
value,  and  therefore  a  series  of  units  of  valuing,  purchasing, 
and  paying  power  limited  in  number  by  the  metallic  com- 
modity, and  in  their  circulation  by  commodities  exchanged, 
and  loans  and  purchases  are  made  only  by  depositors.  Now 
develop  bank  loans,  by  loaning  all  the  metal  and  notes  that 
can  be  loaned,  and  a  large  portion  of  the  metal  will  leave  the 


BANK-NOTE-REDEMPTION  RESERVE.  375 


country,  and  a  large  portion  of  the  notes,  if  strictly  converti- 
ble, will  be  retired,  because  they  are  no  more  necessary  to 
carry  on  the  exchanges  of  commodities  for  consumption  than 
they  were  while  locked  up.  But  the  departing  metal  and 
notes  will  now  be  represented  by  an  equal  amount  of  bank 
debt  which  will  not  remain  equal  long,  but  will  gradually 
increase  in  volume  over  and  above  reserve.  It  will  be  vary- 
ing from  day  to  day  upward,  until,  as  every  man  who  has 
observed  the  phenomena  of  banking  knows,  a  banking  and 
commercial  crisis  comes  as  it  came  in  1857  in  the  United 
States,  when  it  will  decrease  in  volume  corresponding  to  its 
former  increase.  For  several  years  before  1857,  the  volume 
of  loans,  and  therefore  of  deposits,  was  continually  rising,  but 
after  the  crisis  of  1857  it  fell  as  much  as  it  had  risen  before. 

Now  the  analysis  in  various  forms  in  the  preceding  chap- 
ters shows,  if,  in  order  to  simplify  the  case  for  the  reader,  we 
suppose  all  deposit  and  discount  banks  consolidated  into  one 
bank  with  branches,  that  as  fast  as  the  goods  produced  on 
credit  by  the  aid  of  bank  loans  are  sold  for  cash  to  one  who 
does  not  borrow  of  the  bank  to  obtain  it,  and  whether  it  be 
in  the  shape  of  metal,  notes,  or  a  bank  deposit,  the  ratio 
of  bank  reserve  to  bank  debt  is  increased  in  proportion  to 
the  extent  of  the  purchase ;  for  if  the  buyer  borrows  of  the 
bank  to  make  it,  he  merely  takes  the  place  of  the  seller 
who  also  owes  the  bank,  and  who  thus  pays  his  debt ;  and 
the  total  of  bank  loans,  and  therefore  of  bank  debt,  thus  re- 
mains the  same  as  before,  if  the  seller  sells  at  original  cost. 
If  the  seller  sells  at  a  profit,  however,  beside  being  reim- 
bursed for  interest,  charges  for  transportation,  insurance, 
and  other  expenses  he  may  have  paid,  deposits  are  actually 
increased  by  these  items,  which  constitute  a  new  production 
in  value,  added  to  the  goods.  The  ratio  of  bank  reserve  to 
bank  debt  is  left  the  same  as  before,  in  the  first  case.  It  is 
diminished,  in  the  second  case,  through  the  increase  of  the 
total  of  bank  debt  over  and  above  reserve,  by  the  items  of 
profit,  interest,  charges  for  transportation,  insurance,  etc., 
which  went  to  increase  the  amount  of  the  second  loan  over 
and  above  the  first  whose  place  it  took. 


376 


POLITICAL  ECONOMY. 


It  is  a  mistake,  then,  to  aflfirm,  as  Mr.  Bonamy  Price  and 
other  writers  do,  that  deposits  in  the  shape  of  bank  debt 
arise  from  the  sale  of  goods.  They  arise  from  the  produc- 
tion of  goods  and  the  increased  value,  which  is  also  the  re- 
sult of  increased  production,  accruing  to  them  in  their  prog- 
ress towards  a  market.  Again,  these  writers  assert,  that 
while  sales  of  commodities  give  rise  to  deposits  which  are 
bank  debt,  there  is,  by  the  instrumentality  of  checks  and  the 
clearing-house,  a  set-off  or  balancing  of  debts,  as  in  the  case 
of  tradesmen.  This  is  true  as  respects  the  balancing  or  set- 
off, as  I  have  stated  in  previous  chapters,  and  the  process  is 
apparently  but  a  set-off,  with  a  resulting  balance  or  balances 
paid  by  check,  without  the  removal  of  a  single  coin ;  and 
therefore,  if  there  were  not  a  single  coin  in  the  reserve,  the 
result  would  be  the  same.  I  have,  therefore,  in  some  of  the 
preceding  chapters,  called  deposits  over  and  above  reserve, 
units  of  bank  debt,  or  bank  credit,  which  by  their  increase 
and  decrease  seem  to  take  the  place  of  so  much  money. 
But  rigorous  analysis  requires  us  to  look  at  what  is  going  on 
behind  these  movements  in  bank,  and  we  discover  that  the 
balancing  of  debts,  aside  from  the  items  of  profit,  interest, 
etc.,  which  go  by  way  of  increased  production  to  increase  the 
total  of  deposits,  gives  rise  to  no  exchange  of  commodities, 
but  merely  transfers  a  commodity  by  sale  to  a  party  who 
assumes  the  place  in  bank  of  the  seller.  There  is  no  real 
commerce  in  the  case,  because  there  is  no  exchange  of  com- 
modities. But  if  the  goods  are  sold  for  cash  not  borrowed, 
there  is  real  commerce,  because  there  has  been  an  exchange 
of  commodities,  and  bank  debt  over  and  above  reserve  is 
diminished  to  the  extent  of  the  sale  if  payment  is  made  by 
check ;  if  made  with  metal  or  bank-notes,  which  go  into  re- 
serve, bank  debt,  over  and  above  reserve,  is  diminished  by 
the  same  amount.  The  two  payments  are  in  substance  the 
same,  because  either  of  them  carries  deposits  back  the  same 
distance  towards  the  point  where  the  total  of  deposits  and 
the  total  of  reserve  would  coincide,  —  the  point  at  which 
production  on  credit,  by  the  aid  of  bank  loans,  would  be 
balanced  by  the  exchanges  leading  to  consumption.    I  have 


BANK-NOTE-REDEMPTION  RESERVE.  377 


shown  that  well-managed  banks  of  issue,  in  the  absence  of 
deposit  and  discount  banking,  regulate  their  own  metallic 
reserve  by  what  may  be  called,  by  way  of  illustration,  self- 
acting  machinery,  thus  keeping  it  at  an  even  average ;  but 
it  is  totally  different  with  deposit  and  discount  banking,  be- 
cause the  reserve  varies  upwards  for  a  time,  and  then  varies 
downwards  for  a  time,  and  so  on  in  endless  cycles.  The 
consequence  is,  as  before  shown  in  previous  chapters,  that  re- 
demptions of  notes  are  prevented  by  depositing  them,  and 
their  volume  is  thus  forced  out  of  its  definite  relation  to  any 
metallic  reserve.  Even  if  bank-notes  were  constantly  re- 
deemed in  metal,  under  deposit  and  discount  banking,  it 
would  make  little  difference,  because  the  circulation  of  the 
metal  itself  is  not  regulated ;  which  means,  in  the  language 
of  money,  that  its  artificial  circulation,  through  bank  loans, 
over  and  above  its  natural  circulation,  is  not  arrested  always 
at  one  definite  point ;  and,  in  the  language  of  commerce, 
which  stands  behind  money,  that  the  exchanges  of  commod- 
ities for  consumption  are  not  made  to  take  place  as  fast  as 
production,  after  production  on  credit  has  reached  a  fixed 
point.  But  it  is  said  that  banks  deal  only  in  debt  except, 
perhaps,  the  small  current  of  money  which  is  actually  paid 
out.  This  is  utterly  false  under  a  circulation  of  metal,  or 
metal  and  notes. 

In  the  chapter  on  Banking  in  England,  I  called  the  credit 
standing  to  the  account  of  depositors,  units  of  credit,  which 
control  the  units  of  metal.  What  are  these  units  of  credit  ? 
They  are  units  of  bank  debt  due  depositors  over  and  above 
reserve,  arising  from  so  much  production  on  credit  by  the 
aid  of  bank  loans.  They  have  added  seventy-five,  or  per- 
haps, in  England,  eighty-five  per  cent,  to  the  efficient  total  of 
money.  They  are  not  the  cause,  but  the  result,  of  produc- 
tion on  credit.  They  (the  total  of  bank  debt  over  and  above 
reserve)  are  equivalent  in  effect  to  precisely  an  equal  amount 
of  metal  and  notes,  as  powers  to  put  in  circulation  in  pay- 
ment for  labor,  raw  material,  and  commodities,  the  same 
amount  of  money,  which  could  be  circulated,  if  an  equal 
amount  in  bank-notes  or  metal  were  in  the  hands  of  those 


378 


POLITICAL  ECONOMY. 


who  draw  the  checks.  It  is  an  expansion  of  money  equal  to 
the  expansion  in  the  volume  of  goods  produced  and  on  hand 
in  excess  of  an  actual  market.  There  are  no  limits  but  a  crisis 
to  the  progressive  expansion  of  circulation  followed  by  con- 
traction, as  production  progressively  expands  and  contracts, 
in  endless  cycles.  Therefore  I  affirmed  with  truth,  in  the 
chapter  on  Banking  in  England,  that  the  units  of  metal  in 
the  reserve  do  not  control  the  units  of  bank  credit  (resulting 
from  production  on  credit),  but  the  latter  control  the  former, 
and  so  a  large  portion  of  the  benefit  which  ought,  upon  a  true 
theory  of  banking,  to  come  from  the  limitations  of  a  metal- 
lic banking  reserve  made  up  of  metal  and  notes  covered  by 
metal  which  has  been  paid  into  the  bank,  solely  in  conse- 
quence of  a  like  amount  of  goods  exchanged  for  consumption^ 
is  lost.  It  is  an  utter  impossibility  for  a  bank  —  to  speak 
with  rigorous  accuracy  —  to  deal  in  anything  which  it  has 
not  received :  it  deals  and  can  deal  only  in  what  has  been 
deposited  in  it,  and  no  debt  was  ever  deposited,  and  no  debt 
ever  could  be  deposited,  except  in  a  figurative  sense,  in  a 
bank ;  and  so  far  as  I  have  intimated  to  the  contrary,  I  have 
adopted  for  the  moment  the  common  theory  in  order  to  ex- 
plain, upon  that  theory,  some  of  the  phenomena  of  banking. 
If  A.  owes  B.,  if  B.  owes  C,  if  C.  owes  D.,  and  D.  owes  A. 
one  hundred  pounds,  the  debts  can  be  balanced  or  canceled 
by  mutual  agreement,  without  a  single  pound  being  paid  out ; 
but  does  this  prove  that  no  money  has  ever  passed  between 
them  ?  A  large  portion  of  debts  resulting  from  loans  out- 
side of  banks,  if  duly  registered,  and  if  the  parties  could  be 
brought  together,  could  be  thus  balanced.  If  there  were  no 
banks  of  deposit  and  discount  in  England,  and  a  bank  of  de- 
posit were  established,  without  the  power  of  loaning,  to  re- 
ceive say  one  half  of  all  the  money  in  the  kingdom,  and  sev- 
enty-five per  cent,  of  it  were  permanently  locked  up,  leav- 
ing only  twenty-five  per  cent,  to  make  all  the  exchanges,  the 
stream  of  coin  and  bank-notes  going  monthly  into  the  reserve 
of  twenty-five  per  cent,  would  average  with  the  stream  going 
out  monthly.  As  production  increased  over  consumption, 
payments  for  labor  and  raw  material  would  increase,  and  the 


BANK-NOTE-EEDEMPTION  RESERVE.  379 


outward  stream  would  be  the  largest,  while,  as  consumption 
increased  over  production,  the  payments  into  the  reserve  for 
commodities  consumed  would  exceed  the  payments  out  for 
labor  and  raw  material  and  accrued  profits,  interest,  charges, 
etc.,  on  sales,  out  of  the  reserve.  In  a  comparative  state  of 
harmony  between  production  and  consumption,  the  differ- 
ence between  the  two  streams  would  be  small,  and  therefore, 
with  the  exception  of  this  difference,  we  may  suppose  that 
one  stream  could  be  set  off  against  the  other,  and  the  record 
of  the  set-off  would  appear  on  the  books  of  the  bank.  Could 
this  bank  be  said  to  deal  in  its  own  debts  due  depositors  for 
their  deposits  ?  Clearly  not ;  and  the  same  may  be  said  of 
all  banks,  where  the  payment  of  bank-notes  or  coin  is  saved 
by  clearing.  It  has  the  appearance,  perhaps,  of  a  dealing 
in  debt,  but  the  appearance  is  deceptive.  It  is  as  impos- 
sible for  a  bank  to  deal  in  bank  debt  except  in  the  sense 
that  bank-notes  are  bank  debt,  where  metal  and  bank-notes 
constitute  the  circulation,  as  for  the  shadow  of  the  bank 
building,  in  which  the  bank  carries  on  business,  to  be  the 
bank  building  itself.^  A  bank  deals  only  in  what  is  actu- 
ally deposited  in  it,  and  what  is  actually  deposited  in  it  is 
coin  and  bank-notes.  All  else  that  goes  on  in  a  bank  is 
chiefly  debiting,  crediting,  and  registering,  so  far  as  bank 
books  are  concerned.  This  is  not  the  movement  of  money 
itself,  but  only  a  register  of  the  movement.  If  this  were  not 
so,  not  only  would  the  reserve  be  entirely  non-existent,  but 
there  would  be  no  circulation  of  bank-notes  and  metal  from 
which  alone  the  reserve  is  supplied.  Every  banker  knows 
that  when  his  reserve  is  exhausted,  his  power  of  banking  is 
exhausted.    How  can  there  be  but  one  opinion  upon  that 

1  Bank  debt  by  book  might  take  the  place  of  bank-notes,  by  credits  entered  to 
borrowers  on  the  books,  to  be  transferred  by  check,  instead  of  issuing  bank- 
notes. This  would  only  be  the  equivalent  for  equal  amounts  in  bank-notes, 
and  if  loans  were  confined  to  such  credits  with  a  fixed  ratio  of  metallic  reserve, 
it  would  be  equivalent  to  the  issue  of  like  amounts  in  convertible  bank-notes ; 
deposits  without  hank-notes  would  be  the  result  of  actual  commerce,  and  the 
deposits  would  all  be  made  by  checks.  But  introduce  bank  loans  and  we 
should  have  the  same  results  as  where  metal  and  bank-notes  constitute  the 
circulation. 


880 


POLITICAL  ECONOMY. 


point  ?  But  if  this  be  so,  the  only  possible  use  of  the  reserve 
lies  in  actually  using  it ;  that  is,  in  always  receiving  money 
into  it,  when  the  bank  receives  at  all,  and  in  paying  money 
out  of  it,  whenever  the  bank  makes  any  payment  at  all. 
Why,  then,  did  I  say  that  Mr.  Bonamy  Price  was  entitled 
to  ask  the  question,  why  so  much  metal  was  kept  in  the  re- 
serve of  the  Bank  of  England  ?  Because,  following  his  ex- 
ample, I  would  ask  the  same  question  myself  :  it  is  a  shrewd 
and  sagacious  question,  and  implies  vastly  more  than  it  ex- 
presses. So  long  as  the  metal  in  the  reserve  is  much  more 
than  suflBcient  to  supply  the  excess  of  volume  of  the  outgoing 
stream  above  that  of  the  ingoing  stream  of  metal,  and  while 
the  currents  of  both  are  controlled  by  the  production  on  credit 
going  on,  instead  of  the  real  commerce  which  exchanges  com- 
modities for  consumption,  the  surplus  coin,  over  and  above  a 
sufficiency  to  supply  the  outgoing  stream  such  as  it  is,  might 
as  well  be  sold  to  pile  up  in  the  treasury  or  some  other  place, 
as  to  remain  where  it  is.  Mr.  Price  might  ask  his  question 
for  reasons  other  than  these,  but  it  is  certainly  a  question  in 
the  right  direction. 

What  is  the  remedy  for  all  this ;  or  is  there  no  remedy  ? 
Either  to  abandon  discount  bankrng,  I  answer,  or  by  some 
means,  if  possible,  fix  a  definite  point  below  which  banking 
reserve  in  the  shape  of  metal  shall  not  go.  If  this  be  possi- 
ble at  all,  it  must  come  through  the  national  banks. 

The  general  government  can  require  the  national  banks 
to  keep  a  metallic  reserve  of  fifteen  per  cent,  against  bank- 
note circulation,  increasing  it  annually  by  one  per  cent,  until 
it  reaches  twenty  per  cent. ;  and  a  metallic  reserve  of  fifteen 
per  cent,  against  deposits,  to  be  increased  in  like  manner 
until  it  reaches  twenty  per  cent.,  and  then  to  be  increased 
gradually  to  twenty-five  per  cent,  if  required.  A  sufiicient 
tax  might  be  imposed  on  all  private  banks  not  keeping  the 
same  rate  of  reserve,  to  compel  them  to  keep  it,  or  abandon 
banking.  The  reserve  of  the  latter  banks  might  be  kept 
either  in  their  own  vaults  or  with  national  banks,  and  pos- 
sibly in  time  all  private  banking  might  be  abolished  and 
turned  over  to  national  banks,  under  the  authority  of  proper 
constitutional  amendments. 


BA2^K-N0TE-REDEMPTI0N  RESERVE. 


381 


But  a  more  practical  plan  would  appear,  if  the  national 
banks  were  fostered  and  sustained  and  relieved  of  the  bar- 
barous taxation  under  which  they  are  suffering  :  the  greater 
part  of  the  business  of  banking  could  be  transferred  to  the 
national  banks,  and  the  following  scheme  for  the  location  of 
the  reserve  and  its  conversion,  as  respects  bank-note  reserve, 
into  a  collateral  security  for  note  circulation,  may  be  worthy 
of  consideration.  Let  the  general  government  establish  a 
bureau  of  bank-note  redemption,  attached  to  the  sub-treas- 
ury in  New  York  city.  Let  an  account  be  opened  with 
each  bank  and  a  deposit  of  fifteen  per  cent,  in  the  bureau  re- 
quired by  law.  As  soon  as  the  reserve  of  any  bank  is  re- 
duced ten  per  cent,  on  its  total,  that  is  to  say  from  fifteen  per 
cent,  of  its  outstanding  notes  to  thirteen  and  one  half  per 
cent.,  let  the  bureau  be  required  to  notify  the  correspondent 
bank  in  New  York,  which  keeps  the  deposit  account  of  the 
bank  whose  reserve  is  thus  reduced,  and,  failing  such  corre- 
spondent, the  bank  itself.  If  the  reserve  is  not  made  good 
by  a  fixed  time,  let  the  securities  of  the  bank  be  sold  to  an 
extent  sufficient  to  cover  the  deficiency.  Whenever  the  re- 
serve is  made  good,  if  made  good  before  such  sale  takes 
place,  let  the  redeemed  notes  be  returned  to  the  proper  bank. 
In  this  way,  total  bank  reserve  for  the  redemption  of  bank- 
notes will  be  kept  in  definite  ratio  with  the  total  volume  of 
bank-notes,  while  the  whole  reserve  will  be  increased  annu- 
ally one  per  cent,  for  five  years.  For  the  convenience  of 
note-holders,  and  to  make  the  notes  exchangeable  for  metal 
everywhere,  let  all  sub-treasuries  be  required  to  give  metal 
for  the  notes  to  the  extent  of  their  means ;  forwarding  the 
notes  they  receive  for  redemption  to  the  bureau  ;  the  metal 
received  on  redemption  being  in  that  case  immediately  de- 
posited in  the  sub-treasury  in  New  York  city.  The  metal- 
lic reserve  of  fifteen  per  cent,  against  deposits,  to  be  in- 
creased in  like  manner  annually  one  per  cent,  for  five  years, 
might  be  kept  either  in  the  vaults  of  the  banks  or  in  the 
vaults  of  their  correspondent  banks  at  commercial  centres,  or 
in  both ;  and  it  would  probably  be  kept  mostly  in  the  latter. 

In  this  way  and  by  this  plan',  if  the  national  banks  hold 


382 


POLITICAL  ECONOMY. 


three  fourths  of  all  the  deposits  in  the  country,  an  approxi- 
mation will  be  gained  towards  that  point  where  real  com- 
merce will  balance  all  production  on  credit. 

This  scheme  has  been  suggested  in  another  chapter,  but 
I  have  set  it  forth  here  in  detail.  By  being  allowed  to 
make  their  metallic  reserve  for  the  redemption  of  bank-notes 
a  part  of  the  collateral  security  for  notes,  releasing  to  that 
extent  tte  government  debt  held  by  the  United  States  for 
that  purpose,  the  banks  will  be  compensated  for  the  expense 
of  keeping  so  large  a  reserve  against  deposits. 


CHAPTER  XVIIL 


THE  POLICY  OF  EXCLUDING  SMALL  NOTES  CONSIDEEED : 
ON  A  KETURN  TO  CONVERTIBILITY,  OUGHT  ALL  BANK- 
NOTES UNDER  FIVE  DOLLARS  TO  GO  OUT  OF  USE? 

The  answer  to  this  question  depends  entirely  upon  the 
answer  to  another :  Is  it  possible  either  to  regulate  banking 
reserves  themselves  directly,  or  through  a  central  redemp- 
tion of  bank-notes,  indirectly?  If  regulation  by  either 
mode  is  possible,  and  is  also  accomplished,  then  the  exclu- 
sion of  bank-notes  of  five  dollars  and  under  is  unimportant. 
But  why  not  a  regulation  of  itself,  independently  of  all 
others  ?  Because,  upon  the  principles  already  demonstrated, 
the  supposed  contraction  and  consequent  steadiness  of  prices, 
through  the  exclusion  of  such  notes,  not  only  could,  but  in- 
evitably would,  be  overcome  by  the  expansion  of  loans,  and 
consequent  diminution  of  banking  reserve.  The  effect  would 
be  precisely  of  the  same  nature,  so  far  as  it  would  go,  as  that 
of  the  English  Bank  Act  of  1844.  It  would  not  change  the 
ratio  of  variation  in  prices,  but  only  the  maximum  and  min- 
imum range  of  prices  ;  so'  far  it  would  be  beneficial.  But  if 
banking  reserve  is  to  be  regulated,  if  at  all,  by  the  state  leg- 
islatures only,  the  measure  will  be  salutary,  says  a  bullionist. 
This,  I  answer,  would  be  a  hopeless  undertaking,  and  if  ac- 
complished the  small  notes  would  be  harmless.  But  can  it 
not  be  accomplished  with  a  huge  national  bank  of  two  hun- 
dred and  fifty,  three  hundred,  or  it  may  be  five  hundred 
millions  ?  I  am  compelled  to  answer  that  it  cannot.  The 
old  United  States  Bank  answered  as  a  regulator  to  some  con- 
siderable extent  in  its  day,  while  under  the  original  charter, 
because  the  state  banks  it  regulated  were  banks  of  issue. 
The  fact  that  it  was  a  bank  of  issue  itself  did  not  make  it 


384 


POLITICAL  ECONOMY 


a  regulator,  but  rather  the  contrary.  Its  great  capital,  how- 
ever, and  its  management,  more  or  less  directed  to  that  end, 
made  it  to  some  extent  a  regulator,  notwithstanding  its  own 
issues.  Now,  however,  the  right  of  the  state  banks  to  issue 
notes  has  been  virtually  taken  from  them  by  the  tax  of  ten 
per  cent,  upon  their  circulation.  If  that  tax  is  to  continue, 
and  if,  as  the  plan  of  a  large  national  bank  assumes,  the 
present  national  banks  are  to  be  wound  up,  there  will  be  no 
banks  of  issue  to  be  regulated  ;  and  it  is  utterly  impossible 
at  present  to  regulate  common  law  banking,  as  already  de- 
monstrated, unless  the  private  banks  be,  as  they  are  not, 
banks  of  issue.  Therefore,  the  plan  of  a  large  national  bank 
necessarily  assumes  that  on  account  of  its  vast  money  capi- 
tal, holding  as  it  would  a  large  portion  of  the  deposits  of  the 
country,  there  would  be  so  little  money  capital  left  for  other 
banks  that  they  are  entitled  to  no  consideration  in  the  case. 

But  is  it  possible  to  have  such  a  bank  ?  In  order  to  have 
it,  nearly  all  the  money  capital  which  would  be  found  in 
banks,  organized  and  private,  would  require  consolidation. 
Would  it  be  convenient,  or  would  it  indeed  be  possible,  to 
establish  branches  of  such  a  bank  in  the  various  towns  and 
villages  where  national  banks  are  now  found  ?  If  possible, 
it  would  be  so,  simply  because  it  would  be  possible  to  induce 
the  present  banks  to  enter  into  such  an  arrangement.  This 
is  at  least  very  doubtful,  and  it  is  doubtful  whether  there 
could  be  in  so  large  a  bank  sufficient  guaranty  of  conserva- 
tive management. 

Such  a  plan,  therefore,  must  be  abandoned.  A  better 
plan  would  be  to  retain  the  present  banks,  or  the  greater 
part  of  them,  and  to  consolidate  the  banking  capital  of  New 
York,  or  as  much  of  it  as  possible,  with  fixed  minimum  re- 
serve for  all  national  banks,  and  central  redemption  of  bank- 
notes. Indeed,  the  notes  might  be  redeemed  in  a  bureau  of 
redemption,  or  in  this  bank ;  each  bank  outside  of  the  city 
being  required  to  keep  a  fixed  minimum  reserve  there  of  gold. 

The  national  banks  might  retain  their  circulation,  and 
legal  tenders  be  retired,  upon  condition  that  the  banks  keep 
always  at  the  chief  commercial  centre,  at  a  redemption  bu- 
reau, or  other  place,  a  fixed  reserve  of  gold ;  thereby  indi- 


THE  POLICY  OF  EXCLUDING  SMALL  NOTES.  386 


rectly,  but  to  a  large  extent,  regulating  deposit  reserve  and 
bank  loans,  because  the  national  banks  would  possess  prob- 
ably three  quarters  of  all  the  banking  capital. 

With  the  benefit  of  the  conservative  effect  of  banking 
reserves  thus  regulated,  the  exclusion  of  all  notes  of  five 
dollars  and  under  would  not  be  needed  to  counteract  the  ex- 
panding influences  necessarily  arising  through  deposits.  The 
advantage  obtained  in  England  from  the  exclusion  of  notes 
under  five  pounds  is  largely  lost  through  the  low  reserves  of 
private  and  joint  stock  banks.  These  banks  are  only  regu- 
lated indirectly  and  partially  by  the  Bank  of  England,  in 
respect  to  international,  not  internal  or  domestic  trade.  If 
they  were  compelled  to  keep  a  fair  and  well  regulated,  —  in 
short,  a  fixed  minimum  reserve  of  twenty  per  cent.,  the  reg- 
ulating influence  of  the  metallic  circulation  would  be  appar- 
ent. Even  a  fixed  minimum  reserve  of  fifteen  per  cent., 
gradually  increased,  would  produce  the  desired  effect.  To 
the  United  States,  the  question  of  contraction,  for  the  pur- 
pose of  obtaining  steadier  prices,  is  vital,  and  as  much  so, 
perhaps,  in  a  moral  as  an  industrial  and  monetary  point  of 
view.  It  has  been  demonstrated  in  the  foregoing  pages  that 
a  circulation  of  gold  and  silver  is  not  necessarily  any  safer, 
and  will  not  produce  steadier  prices  than  a  paper  currency, 
under  like  circumstances,  when  banking  reserve  is  not  regu- 
lated, as,  in  fact,  it  never  yet  has  been.  If  the  banks  of  the 
United  States,  after  returning  to  specie  payments,  were  to 
adopt  and  maintain  the  plan  of  a  fixed  minimum  banking  re- 
serve of  say  twenty  per  cent.,  circulation  would  be  confined, 
as  far  as  it  could  be,  to  supplying  consumers,  and  promoting 
harmony  of  production  by  thenceforth  confining  it  at  that 
point  to  a  consumer's  market,  and  stopping  at  that  point  all 
overproduction.  The  case  would  be  precisely  the  same  in 
England  if  the  English  government  were  to  adopt  the  same 
course  as  to  all  banking  reserve,  notes  being  issued  freely  to 
the  Bank  of  England  upon  the  government  debt  due  the 
bank.  There  would  then  be  a  call  for  gold,  to  bring  up  all 
banking  reserve  to  twenty  per  cent.  But  without  such  a 
change,  less  than  twenty  millions  pounds,  gold,  would  be 

25 


386 


POLITICAL  ECONOMY. 


required  to  make  the  total  currency  in  England  gold  and 
silver,  or  strictly  representative  of  them.  In  fact,  for  all  the 
purposes  of  this  question,  we  may  consider  the  currency  as 
strictly  representative  for  a  small  part,  and  for  the  remainder 
actually  gold  and  silver;  and  then,  beside  the  demonstration 
already  given,  what  are  the  actual  facts  ?  Why,  that  Great 
Britain,  of  all  commercial  countries  in  the  world,  if  we  ex- 
cept the  United  States,  is  most  subject  to  banking  and  com- 
mercial crises.  She  is  undergoing  one  now,  in  1877.  It  is 
true  there  has  been  no  "  panic  "  as  yet ;  but  a  panic  is  only 
a  spasm,  which  shows  the  existence  of  disease ;  it  is  not  the 
disease  itself,  however,  in  any  case.  The  gold  and  silver 
circulating  in  England  in  the  shape  of  sovereigns,  might  to 
a  great  extent  be  quite  as  well  in  bank,  and  represented  ex- 
actly by  the  same  number  of  one  pound  notes,  were  the  re- 
serve duly  regulated.  The  Scotch,  with  more  bank-notes  in 
proportion,  claim  to  have  been  least  affected  by  banking 
crises.  They  must  have  had  more  or  less  expansion  and  con- 
traction of  loans,  and  hence  in  trade ;  but  they  probably  suf- 
ered  less  than  the  English  from  the  banking  crisis  witnessed 
in  London,  and  throughout  Great  Britain,  more  or  less,  in 
1866  ;  and  why  ?  Simply  because  the  two  parties  required  to 
produce,  in  the  course  of  the  three  or  four  years  preceding 
1866,  the  elements  of  a  banking  and  commercial  crisis  of  the 
first  magnitude,  —  viz,  bankers  and  borrowers,  —  were,  so  far 
as  Scotland  is  concerned,  eminently  conservative,  cautious,  and 
sagacious,  and  loans  were  made  with  greater  care  and  less 
expansion.  The  borrowers  were  as  cautious  about  expend- 
ing their  money  unproductively  as  the  bankers  in  lending. 
Nevertheless,  Scotland,  like  all  other  parts  of  the  United 
Kingdom,  must  have  been  subject  to  the  general  reaction  in 
1866,  as  she  had,  more  or  less,  participated  in  the  expansion. 
This  was  unavoidable,  because  it  is  inseparable  from  the  de- 
posit loan  system,  no  matter  how  conservative  the  bankers 
and  borrowers,  when,  as  always  has  been  the  case  hitherto, 
the  reserve  has  been  allowed  to  vary  below,  as  well  as  above 
an  average.  It  has  so  varied  hitherto,  because  the  necessity 
of  a  fixed  minimum  has  never  before,  to  my  knowledge,  been 
asserted  ;  certainly  never  demonstrated. 


CHAPTER  XIX. 


GOLD,  SILVEE,  AND  OTHER  METALLIC  UNITS  OF  MONEY. 

If  only  one  metal,  like  gold,  silver,  or  tin,  were  in  use  to 
furnish  units  of  conventional  value,  purchase,  and  payment, 
the  total  purchasing  power  of  all  the  units  throughout  the 
commercial  world  would  be  a  mere  abstraction,  because  all 
the  units  could  not  be  used  at  one  and  the  same  time,  being 
scattered  in  the  tracks  of  commerce;  and  in  like  manner, 
the  value  of  all  the  units  of  commodities  throughout  the 
commercial  world,  as  expressed  by  the  total  of  coin,  would 
be  an  abstraction,  because  the  whole  of  them  could  by  no 
possibility  be  sold  at  one  and  the  same  time,  by  one  set  of 
sellers.  The  production  of  commodities,  and  their  distribu- 
tion by  means  of  exchanges,  are  taking  place  at  all  times 
between  different  producers,  or  their  agents.  This  makes 
local  valuations ;  and  these  valuations,  taken  together,  give 
the  average.  The  commodities  being  distributed  throughout' 
the  commercial  world,  the  money,  which  is  with  scarcely  an 
exception,  certainly  with  very  few  exceptions,  paid  for  them, 
either  before,  or  shortly  after  they  are  consumed,  must  nec- 
essarily be  distributed  throughout,  as  the  commodities  them- 
selves are.  Now  capital  is  that  which  with  the  aid  of  labor 
produces  the  commodities.  What  is  capital  ?  It  is  not  a 
bill  of  exchange ;  it  is  not  a  promissory  note  ;  it  is  not  a 
mortgage ;  it  is  not  a  deed  or  patent  of  land ;  it  is  not  the 
bond  of  an  individual ;  it  is  not  the  bond  of  a  corporation  ; 
it  is  not  a  certificate  of  stock  in  a  corporation.  What  then 
is  it  ?  It  is  land  with  the  appurtenances ;  it  is  a  railroad 
with  its  rolling  stock  ;  it  is  cotton  or  wool,  ready  to  be  made 
into  cloth  ;  it  is  gold  or  silver  bullion,  or  any  other  metal 
manufactured  or  not  manufactuted ;  it  is  movable  property 


388 


POLITICAL  ECONOMY. 


of  any  kind  in  the  hands  of  a  producer,  who  has  not  yet  sold 
it ;  when  sold  to  a  consumer,  if  designed  for  actual  con- 
sumption, it  ceases  to  be  capital  in  a  true  sense,  because  no 
more  value  can  be  added  to  it  by  a  producer.  Its  consump- 
tion may  take  place  immediately,  or  only  after  long  use ; 
and  meantime,  in  consequence  of  this  consumption,  room  is 
given  for  more  production,  the  consumer  himself,  either  act- 
ually in  his  own  proper  person,  or  through  his  agency  as  a 
capitalist,  acting  the  part  of  producer  to  the  producer  who 
supplied  him,  and  who  thus  in  his  turn  acts  the  part  of  con- 
sumer. Every  member  of  the  community,  therefore,  who 
has  an  income,  is  either  actually  or  representatively  a  produ- 
cer, while  he  and  those  he  provides  for  are  consumers.  His 
bonds,  mortgages,  notes,  bills,  deeds,  and  certificates  of  stock 
are  not  capital,  but  documentary  evidence  of  it.  Hence,  by 
the  way,  to  tax  a  railroad  and  its  equipment  as  a  whole  to 
a  corporation,  and  at  the  same  time  to  tax  the  several  parts 
of  the  whole  to  the  owners  of  stock,  is  to  tax  productive 
capital  twice  ;  and  to  tax  the  bond-holder  is  to  tax  the  third 
time.  To  tax  land  to  its  full  value  to  the  owner,  and  the 
mortgage  upon  it  to  a  mortgagee,  is  to  tax  twice.  But  this 
taxation  is  no  worse,  and  no  more  unjust,  than  the  taxation 
of  money. 

If  A.  has  to-day  ten  thousand  dollars  in  gold  or  bank-notes 
in  his  safe,  or  a  deposit  of  like  amount  in  a  commercial  bank, 
and  loans  it  out  to-morrow  on  bond  and  mortgage,  he  is  se- 
cured by  what  is  called  fixed  capital :  if  he  makes  a  commer- 
cial loan  and  takes  a  bill  of  exchange  or  note,  he  is  secured, 
but  to  a  less  certain  degree,  by  what  is  called  quick  cap- 
ital. It  is  claimed  by  some  that  if  he  be  taxed  to-day  on  his 
money,  taxation  will  be  just,  but  if  he  is  not  taxed  until  to- 
morrow, after  he  has  loaned  it,  it  will  be  unjust,  unless, 
should  he  loan  on  fixed  capital,  the  owner  of  the  fixed  capi- 
tal, who  secures  him,  is  released  from  taxation  to  the  extent 
of  the  loan.  If  he  loans,  however,  in  effect,  upon  the  security 
of  quick  capital  in  the  owner's  hands,  although  he  takes  only 
a  bill  or  note,  it  is  not  claimed  that  the  taxation  of  his  note 
or  bill  is  unjust. 


GOLD,  SILVER,  AND  OTHER  METALLIC  UNITS.  389 


The  foregoing  brief  analysis  demonstrates  the  utter  fallacy 
of  claiming  exemption  from  taxation,  for  corporation  bonds 
and  stocks  and  mortgages  of  all  kinds,  without  claiming  at 
the  same  time  exemption  for  money.  The  answer,  in  oppo- 
sition to  my  analysis  and  the  inference  I  draw  from  it,  would 
undoubtedly  be,  coin  is  a  commodity  ;  if  A.  has  ten  thousand 
dollars  in  gold  coin  to-day,  he  has  a  substantial  commodity, 
and  if  he  has  the  same  amount  in  bank  debt,  he  can  convert 
it,  on  demand,  into  coin :  he  ought  to  be  taxed  precisely  as  if 
he  had  wheat  or  cloth  for  sale  to  that  value ;  but  when  he  has 
made  the  loan,  he  has  only  a  right  of  action.  Such  utterly 
fallacious  reasoning  as  this,  falsely  founded  upon  the  real 
fact  that  the  material  of  gold  coin  is  a  commodity,  —  this 
fact  producing  the  illusion,  that  the  coin  itself,  when  used  as 
money,  continues  to  be  a  commodity,  —  is  of  that  sort  which 
keeps  from  the  understanding  the  perception  of  the  true 
nature  and  office  of  money.  There  is  no  sound  reason  why 
a  capitalist  should  be  assessed  and  taxed  on  his  money,  and 
not  assessed  and  taxed  on  his  mortgages.  If  there  were  no 
production,  there  could  be  no  taxation :  all  taxes  are  paid 
out  of  production,  and  not  otherwise ;  production  ought,  if 
possible,  to  be  taxed  but  once,  and  therefore  it  is  certain  that 
in  all  these  cases  production  is  overtaxed,  because,  in  other 
cases,  it  is  taxed  but  once. 

There  are  methods  by  which,  in  such  cases,  double  taxa- 
tion might  sometimes  be  avoided,  but  I  shall  not  refer  to 
them.  My  object  is,  to  furnish  an  absolute  demonstration 
in  another  form  of  the  fallacy  of  the  proposition,  that  money 
is  under  any  circumstances  to  be  taxed  as  a  commodity  ;  for 
until  that  is  demonstrated,  and  the  demonstration  under- 
stood, it  is  utterly  useless  to  attempt  to  show  what  the  true 
grounds  of  taxation  are.  Why  should  A.  be  assessed  to- 
day on  ten  thousand  dollars,  gold  coin,  if  he  has  it,  and  not 
assessed  on  the  same  amount  in  bonds  and  mortgages? 
The  ten  thousand  dollars,  gold  coin,  demonstrate  that  he  has 
caused  production  to  take  place  to  that  amount,  because,  first 
or  last,  he  has  sold,  or  caused  to  be  sold,  products  for  the 
ten  thousand  dollars  in  gold  he  has  now  in  his  safe.    In  like 


390 


POLITICAL  ECONOMY. 


manner,  his  bonds  and  mortgages  demonstrate  the  same  fact. 
The  possession  of  the  ten  thousand  dollars,  coin,  does  not 
demonstrate  that  it  cost  ten  thousand  dollars  to  mine,  smelt, 
and  coin  the  gold  in  his  possession,  but  it  demonstrates,  if 
he  is  not  a  thief,  a  robber,  or  a  swindler,  that  it  cost  him 
ten  thousand  dollars'  worth  of  products ;  and  precisely  there 
the  demonstration  stops.  He  has  parted  with  products,  and 
has  nothing  but  money,  which  is  serviceable  to  buy  products 
such  as  he  wants,  to  take  the  place  of  those  he  did  not  want, 
and  therefore  sold. 

The  only  power  possessed  by  the  money,  then,  is  valuing, 
purchasing,  and  paying  power,  which  is  conventional  only. 
He  will  continue  to  get  products  for  his  money  as  long  as 
the  convention  lasts,  but  no  longer.  When  it  is  abrogated 
or  repealed  by  the  government,  acting  in  the  name  and  on 
behalf  of  the  community,  he  can  use  the  power  no  longer, 
but  meantime  some  kind  of  redemption  will  take  place  by 
the  government,  in  the  shape  of  units  of  other  metal,  given 
him  in  exchange  for  his  gold  at  the  treasury ;  and  if  the 
government  is  unable  to  do  this  at  once,  it  will,  while  stop- 
ping all  further  coinage  of  that  metal,  allow  the  pieces  in 
circulation  to  continue  in  circulation  at  their  former  value 
until  gradually  redeemed  and  retired  by  the  new  metal. 
But  meantime  the  material  out  of  which  the  old  coin  is 
made  (gold  bullion)  may  sink  in  value  twenty,  thirty,  or 
fifty  per  cent.  Who  shall  bear  this  loss  ?  There  is  no  loss 
whatever  to  the  holders  :  their  money  circulates  at  par,  not- 
withstanding the  depreciation.  Why  is  this  ?  The  com- 
modity out  of  which  the  coin  is  manufactured  has  depre- 
ciated twenty  per  cent,  or  more,  which  is  a  greater  loss  than 
could  happen  by  years  of  taxation ;  and  if  the  coin  is  a  com- 
modity also,  it  must  depreciate  to  the  same  extent.  But  it 
does  not ;  and  hence  it  is  clear  that  as  coin  it  must  be  taken 
out  of  the  category  of  commodities.  Upon  what  principle, 
then,  does  it  circulate  at  par  ?  Clearly,  manifestly,  upon 
that  of  convention.  The  government,  representing  society, 
has  so  enacted,  and  the  people  have  by  their  acts  ratified  the 
enactment.    Even  if  the  government  had  not  so  enacted,  the 


GOLD,  SILVER,  AND  OTHER  METALLIC  UNITS.  391 


people  might,  and  probably  would,  continue  to  use  it  until  it 
had  been  gradually  retired,  losing  purchasing  power  from 
time  to  time.  No  enactment  of  government  can  fix  the  value 
of  commodities,  but  it  can  take  the  coinage  into  its  own  hands 
exclusively  (to  a  certain  extent),  and  coin  gold  eagles  and 
double  eagles  of  half  the  present  standard  weight,  and  make 
them  legal  tender  to  the  same  extent  as  those  of  full  weight. 
What  then  ?  Will  the  purchasing  power  of  the  new  coin 
sink  to  one  half  that  of  the  old  coin  ?  Here  is  a  crucial 
test.  As  government  cannot  by  legislation  change  the  value 
of  any  commodity,  and  as  the  only  possible  value  of  gold 
coin  lies  in  its  purchasing  power,  if  the  purchasing  power  of 
the  coin  is  reduced  one  half,  then  gold  coin  is  a  commodity ; 
if  it  is  not,  then  it  certainly  is  not  a  commodity.  Now  the 
effect  of  this  coinage  would  be  to  drive  out  a  part  of  the  old 
coin,  but  not  exactly  to  the  extent  of  the  new  issue.  The 
new  issue  would  have  the  same  purchasing  power  as  the  old, 
minus  the  small  loss  of  purchasing  power  that  would  result 
if  the  amount  of  gold  economized  in  the  coinage,  instead  of 
being  economized,  had  been  suddenly  discovered  as  buried 
treasure.  Suppose  the  amount  economized  to  be  one  hun- 
dred millions  of  dollars.  The  ratio  of  this  economy  of  mate- 
rial to  the  commercial  world's  treasure  in  the  shape  of  coin, 
if  we  call  that  treasure  ten  thousand  millions  of  dollars, 
would  be  one  per  cent.  only.  If  the  coinage  were  to  take 
place  gradually,  therefore,  the  final  loss  of  purchasing  power 
would  be  one  per  cent.,  against  a  national  economy  of  twenty 
per  cent.,  if  the  national  circulation  were  five  hundred  mill- 
ions. Hence,  by  the  clearest  demonstration,  the  two  hun- 
dred millions  of  coin  of  half  the  usual  weight  are,  in  the 
country  where  coined,  equal  to  the  same  number  of  full 
weight.  Were  government,  acting  on  behalf  of  the  com- 
munity, to  attempt  to  fix  the  value  of  copper,  iron,  or  tin, 
the  attempt  would  prove  abortive;  but  it  has,  in  the  case 
supposed  above,  where  the  metal  gold  was  not  demonetized, 
actually  depreciated  gold  coin  throughout  the  commercial 
world.  This  depreciation  was  not  the  result  of  demonetiza- 
tion, but  of  increased  coinage,  the  local  gain  of  twenty  per 


392 


POLITICAL  ECONOMY. 


cent,  being  the  exact  equivalent  of  the  commercial  world's 
loss,  which  was  one  per  cent.  Hence  the  value  of  bullion  as 
a  commodity  can  be  extensively  controlled  by  local  coinage. 
Again  :  suppose  all  the  countries  in  the  commercial  world, 
following  the  example  in  the  case  assumed  above,  should 
make  an  equal  proportion  of  their  gold  coins  of  half  weight, 
declaring  them  to  possess  the  same  value  in  exchange  as 
they  had  previously  done  when  of  full  weight.  What  would 
be  the  result  ?  The  same  as  in  the  case  supposed.  If  the 
gold  economized  amounted  to  one  thousand  millions  of  dol- 
lars, it  would  be  equivalent  to  the  production  of  that  sum 
in  gold,  with  a  resulting  depreciation,  spread  over  the  com- 
mercial world,  of  twelve  and  one  half  per  cent.,  the  ratio  of 
the  amount  economized  to  the  total  mass  in  coin  being  as 
1,000  to  5,000. 

But  would  that  be  the  measure  of  the  depreciation  ulti- 
mately ?  No  ;  because  one  third  of  the  amount  saved  would 
go  into  manufacture,  making  the  net  depreciation  only  thir- 
teen and  one  third  per  cent.  Upon  this  principle  all  token 
money,  as  it  is  called,  circulates.  If  Germany  or  the  nations 
of  the  Latin  Union  choose,  either  or  all  of  them  can  coin 
more  silver  of  the  present  standard,  at  the  old  rate  of  15|, 
and  it  will  be  equal  in  purchasing  power  to  gold  at  that 
ratio,  instead  of  the  ratio  prevailing  in  the  bullion  market, 
provided  their  issue  be  confined  within  proper  limits.  Again, 
they  or  either  of  them  could  coin  silver  anew  according  to 
the  present  ratio  of  silver  to  gold  bullion  ;  and  if  the  monop- 
oly of  coinage  still  remained  with  the  governments,  and  this 
coinage  were  not  so  extensive  as  to  find  such  a  market  for 
silver  bullion  as  would  raise  materially  the  present  price, 
the  new  coins  of  increased  weight  would  still  circulate  by 
the  side  of  the  others  of  the  old  weight.  The  fact,  then, 
is,  that  where  gold  is  the  standard,  coins  of  half  the  usual 
weight  could  be  used  up  to  a  certain  point,  with  national 
"  economy,"  at  the  expense  of  international  economy.  It 
would  be  equivalent  to  the  actual  production  from  the  mines 
of  the  amount  economized,  and  the  latter  would  be  equiva- 
lent to  so  much  convertible  paper  money.    But  an  increased 


GOLD,  SILVER,  AND  OTHER  METALLIC  UNITS.  393 


production  of  gold  diminishes  the  purchasing  power  or  value 
of  gold  in  proportion  to  the  increase  as  compared  with  the 
mass  already  existing ;  and  the  same  is  true  of  silver,  because 
it  increases  the  number  of  units  which  can  be  coined,  dis- 
tributed, and  paid  out.  Hence  the  increase  of  metallic  pro- 
duction, on  the  one  hand,  and  the  decrease  of  production, 
on  the  other,  are  material  chiefly,  as  they  enable  a  greater 
or  less  quantity  of  metal  to  be  used  in  the  arts,  and  so  min- 
ister to  the  wants  of  civilized  man.  What  do  these  facts 
plainly  demonstrate  ?  If  they  are  facts,  or  unquestionable 
truths,  they  plainly  demonstrate  that  the  value  of  all  metal- 
lic money,  and,  by  parity  of  reason,  of  all  other  money,  is 
conventional,  and  it  is  not  a  proper  subject  of  taxation  ;  that 
the  larger  field  of  convention  controls  the  smaller  field,  and 
that  so  long  as  the  convention  of  the  smaller  field  comes  not 
in  conflict  with  that  of  the  larger,  it  stands  ;  otherwise,  so 
far,  and  only  so  far,  it  necessarily  falls.  The  laws  of  trade 
settle  this  question  practically,  because  all  merchandise  goes 
where  it  is  worth  most.  If  the  metal  leaves  the  smaller  field 
for  the  larger,  however,  it  goes  not  as  ordinary  merchandise, 
because  there  is  a  demand  for  it,  but  because  its  value  hav- 
ing, by  reason  of  general  usage,  been  practically  fixed  as 
matter  of  convention,  the  convention  must  stand  until  abro- 
gated by  one  equally  general. 

The  terms  of  the  convention,  evidenced  by  usage,  are, 
that  gold  and  silver,  or  one  of  them,  shall  be  universally  re- 
ceived as  the  world's  money.  There  is  no  mode  of  using  it 
but  by  weight  or  measure,  and  the  former  has  been  adopted. 
Governments,  on  behalf  of  their  respective  communities, 
have  undertaken  the  coinage,  either  with  or  without  a  small 
seigniorage,  for  all  the  owners  of  bullion.  The  question  then 
is  one  of  supply,  so  far  as  the  commercial  world  is  concerned, 
and  metallic  money  follows  commerce.  If  any  nation,  or 
any  number  of  nations,  were  resolved  to  economize  gold  in 
the  manner  before  suggested,  by  gradually  calling  in  and  re- 
coining  their  different  denominations  of  gold  coin  at  half 
standard  weight,  by  the  time  one  half  of  it  could  be  coined 
a  portion  of  the  other  half  would  have  left  for  other  parts 


394 


POLITICAL  ECONOMY. 


of  the  commercial  world.  Short  of  recoining  one  half  of 
all  the  gold  coin  throughout  the  commercial  world,  it  could 
be  accomplished  with  some  profit ;  one  quarter  with  great, 
and  one  eighth  with  stiU  greater  proportionate  local  profit : 
it  would  be  equivalent  to  issuing  so  much  paper.  If  the 
whole  commercial  world  were  to  recoin  all  the  gold  in  like 
manner,  however,  the  result  would  be  nothing,  because  the 
purchasing  power  of  each  coin  would  be  reduced  one  half. 
Hence  it  is  clear  that  gold  and  silver  coin,  and  indeed  any 
kind  of  metallic  money  equally  with  bank-notes,  ought  to 
be  taken  out  of  the  category  of  commodities  justly  liable 
to  taxation,  because  no  money  can  by  any  possibility  be  a 
commodity,  in  its  character  of  money.  This  is  a  propo- 
sition which  must  be  clearly  perceived  and  fully  under- 
stood, before  it  is  possible  to  have  any  true  conception  of 
money,  and  the  influence  it  has  over  the  fortunes  and  the 
fates  of  all  producers.  To  understand  what  money  is,  we 
must  know  what  a  simple  ratio  is.  It  is  a  relation  existing 
between  numbers.  If  a  dollar  be,  as  with  us  it  is,  the  unit 
of  money,  the  term  Dollar  is  the  Standard ;  that  is  to  say, 
it  is  the  Standard  Unit  whose  additions,  one  to  the  other, 
and  whose  subdivisions,  constitute  the  numerator  of  that 
ratio  whose  result  or  quotient  is  Price.  If  one  unit  of  cloth, 
called  a  yard,  be  worth  one  dollar,  the  statement  of  the  ratio 
is  and  the  quotient  or  price  is  1 ;  that  is  to  say.  One 

Dollar :  if  one  unit  of  cloth  be  worth  two  dollars,  the  state- 
ment of  the  ratio  is  y^|^.  The  value  of  the  units  of  goods 
estimated  in  money  is  therefore  directly  as  the  units  of 
money  by  which  the  estimation  is  made ;  and  the  value  of 
the  units  of  money,  estimated  in  units  of  goods,  directly  as 
the  units  of  goods.  Hence  the  value  of  money  and  the 
value  of  goods  are  always  inversely  proportioned  to  each 
other :  as  one  rises  the  other  falls,  and  as  one  falls  the 
other  rises.  This  is  altogether  an  artificial  arrangement, 
although  naturally  developed  ;  and  hence  the  value  of  the 
goods  thus  estimated  in  money,  and  the  value  of  the  money 
thus  estimated  in  goods,  are  both  equally  artificial  and 
conventional.    The  units  of  goods,  so  far  as  they  estimate 


GOLD,  SILVER,  AND  OTHER  METALLIC  UNITS.  395 


the  value  of  the  units  of  money,  are  abstract  and  intan- 
gible, as  the  units  of  every  ratio  must  be ;  but  the  goods 
are  only  used  for  this  purpose  once,  to  enable  them  to  be 
valued,  exchanged,  and  consumed ;  the  money  is  always 
used  in  this  manner,  and  can  be  used  in  no  other.  Hence 
units  of  coin,  being  scattered  in  the  tracks  of  commerce 
throughout  the  world,  have  value  in  goods,  inversely  propor- 
tioned to  the  number  of  them,  offered  for  a  certain  number 
of  units  of  goods.  The  purchasing  power  of  the  unit  of 
money  depends  upon  the  total  number  of  units  of  money 
throughout  the  commercial  world,  the  demand  as  affected  by 
the  state  of  civilization,  the  distribution  of  the  money  in 
payment  for  labor  and  materials,  and  the  energy  of  produc- 
tion. 

The  units  of  coin  being  always  used  as  money,  therefore, 
are,  as  such  units^  intangible  and  abstract ;  and  the  mass  of 
coin  throughout  the  world,  if  only  one  metal  were  in  use, 
must  always  furnish  units  of  purchasing  power  proportioned, 
as  before  stated  in  the  case  of  silver  or  gold,  by  weight,  no 
matter  what  the  quality  of  the  metal  or  weight  of  its  mass 
may  be.  If  there  are  two  metals,  they  must  necessarily 
have  the  purchasing  power,  or,  in  other  words,  conventional 
value  of  their  respective  coins,  proportioned  to  each  other 
inversely,  as  the  weights  of  their  respective  masses  existing 
in  the  shape  of  coin.  If  there  were  but  one  metal,  the  pur- 
chasing power  of  the  coins  must  vary  ultimately,  as  the 
weight  of  the  total  mass  in  coin  varies.  Hence,  if  there 
were  two  metals  universally  and  equally  distributed  through- 
out the  commercial  world,  and  used  as  money,  the  purchas- 
ing power  of  the  two  could  never  exceed  that  of  one,  were 
one  alone  used  as  money,  because  the  purchasing  power  is 
limited  by  the  total  of  goods.  Hence,  also,  by  the  law  of 
absolute  necessity,  that  is  to  say,  the  absolute  impossibility 
of  its  being  otherwise,  the  purchasing  power  of  the  coins  of 
either  metal  must  be  to  those  of  the  other  as  the  weights  of 
their  respective  masses  in  coin  ;  and  the  total  potential  pur- 
chasing power  of  the  two  metals  must  be  equally  divided 
between  the  two.    This  proposition  is  true  only  upon  the 


396 


POLITICAL  ECONOMY. 


supposition  that  two  metals  distributed  throughout  the  com- 
mercial world,  like  gold  and  silver,  are  equally  and  every- 
where monetized  ;  and  it  would  hold  good  were  there  three, 
or  any  other  number  of  metals,  instead  of  two ;  the  adop- 
tion of  any  one  metal  being  conventional,  that  of  a  second, 
third,  or  fourth  would  be  equally  so.  Having  been  adopted, 
if  there  were  three  metals,  the  purchasing  power  of  one 
ounce  of  either  of  the  three  metals  would  be  to  that  of 
either  of  the  remaining  two  inversely  as  the  weights  of  the 
respective  masses  of  the  metals  in  coin.  This  proposition 
would  be  true  to-day  of  silver  and  gold,  if  they  were  equally 
and  everywhere  metallic  material  for  coining  money  through- 
out the  commercial  world  ;  but  silver  of  late  having  been 
refused  coinage  in  the  Latin  Union  in  consequence  of  a  like 
proceeding  in  Germany,  having  been  long  before  demone- 
tized by  Great  Britain  directly,  and  by  the  United  States  in- 
directly, the  proposition  is  not,  in  fact,  true  now  of  these 
metals.  Were  silver  to  be  renionetized  fully  by  one  or  more 
governments,  the  relation  between  the  two  metals  in  the 
particular  mentioned  would  approximate  more  or  less  towards 
that  of  equality  of  conventional  value,  as  previously  stated, 
according  to  the  extent  of  the  commerce  of  the  governments 
remonetizing. 

ACTUAL  RELATIONS  BETWEEN  COINED  UNITS  OF  METALLIC 
MONEY;  BETWEEN  THE  TOTALS  OF  THOSE  UNITS  AND 
THE  MASSES  OF  METAL  NOT  COINED;  AND  BETWEEN 
THE  MASSES  NOT  COINED,  THEMSELVES. 

The  relation,  in  point  of  conventional  value,  between 
silver  and  gold,  has  been  stated  in  general  terms.  Were 
gold  to  be  fully  monetized  by  all  the  eastern,  and  silver  by 
all  the  western  nations,  the  ratio  would  probably  be  essen- 
tially changed  from  the  old  one  of  15^,  existing  prior  to  the 
late  partial  demonetizations  in  Europe.  The  ratio  of  15^ 
having  been,  prior  to  those  demonetizations,  very  nearly  the 
true  one,  assuming  it  to  be  the  exact  one,  there  must  have 
been,  on  the  average,  one  pound  of  gold  in  coin  very  nearly 
for  every  fifteen  and  one  half  pounds  of  silver.    Were  it 


GOLD,  SILVER,  AND  OTHER  METALLIC  UNITS.  397 


not  SO,  that  ratio  could  not  have  been  so  long  maintained. 
Whatever  would  be  the  true  ratio  in  case  of  a  general  mon- 
etization  of  both  metals  by  all  nations,  or  in  case  the  mono- 
silver  standard  were  adopted  by  nations  having  half  the 
world's  commerce,  and  the  mono-gold  standard  by  nations 
having  the  other  half,  in  either  case  equal  values  of  the  two 
metals  would  be  maintained  in  coin  and  equal  values  in 
manufactured  commodities.  What  would  be  the  ratio  under 
a  universal  monetization  of  both  metals  is  conjectural.  It 
probably  would  not  be  less  than  15  and  1.  There  must  have 
been,  for  a  considerable  period,  very  nearly  equal  amounts  of 
gold  and  silver,  in  point  of  value,  in  coin,  and  equal  amounts 
of  each  in  a  manufactured  state.  If  the  true  ratio  between 
silver  and  gold  were  15,  instead  of  15^,  and  the  production  of 
silver  to  that  of  gold  as  45  to  1,  then  one  third  of  the 
mass  in  weight  of  gold,  and  seven  ninths  of  that  of  silver, 
must  have  gone  into  manufacture.  The  mass  of  silver  by 
weight  which  has  gone  into  manufacture  would  then  be  to 
that  of  gold  manufactured,  as  105  to  1.  But  the  premises 
are  only  approximately  true ;  it  cannot  be  known,  as  matter 
of  fact,  what  the  ratios  of  metallic  production  have  aver- 
aged. Under  a  general  monetization  of  both  metals,  pur- 
chasing power  must  constantly  tend  to  an  even  division  be- 
tween them,  thus  maintaining  at  average  the  ratios  of  com- 
modity value  ;  and  where  either  metal  is  demonetized  the 
other  must  gradually  take  its  place  in  the  conventional  field, 
and  at  last,  in  process  of  time,  acquire  potentially,  as  a  series 
of  valuing  units,  all  the  valuing  power  the  departing  units 
surrender.  The  total  volume  of  units  of  both  metals  taken 
together  becoming  gradually  less  and  less,  when  the  demon- 
etizations take  place,  and  as  the  departing  units  are  with- 
drawn, the  value  of  those  which  remain  must  increase  as 
their  whole  number  is  diminished,  but  so  slowly  as  to  escape 
notice,  and  therefore,  for  all  practical  purposes,  without  in- 
jury. This  is  the  correct  statement  of  results,  independ- 
ently of  compensating  incidents.  The  latter  are  an  increas- 
ing stimulus  to  the  production  of  the  metal  whose  barter 
value  as  bullion  has  increased ;  decreasing  stimulus  to  the 


398 


POLITICAL  ECONOMY. 


production  of  the  metal  whose  barter  value  as  bullion  has 
fallen  off ;  decreasing  consumption  of  the  former,  and  in- 
creasing consumption  of  the  latter  metal  for  purposes  of 
manufacture,  because  it  is  cheaper  than  before  demonetiza- 
tion. Subject  to  these  compensating  incidents,  the  general 
tendency  is  as  stated.  Did  these  not  arise,  the  barter  ratio 
between  metals,  as  changed  by  demonetization,  would  ulti- 
mately extend  to  both  metals  in  their  character  of  units  of 
money,  by  enlarging  the  volume  of  the  units  of  merchan- 
dise in  commerce  relatively  to  that  of  the  units  of  metal  not 
demonetized,  and",  on  the  other  hand,  by  diminishing  it  as 
compared  with  that  of  the  units  of  metal  demonetized.  We 
have  here  demonstrative  evidence  of  the  proposition  that  a 
piece  of  silver  or  gold,  used  as  a  coin,  mlues  only  as  a  single 
unit,  in  proportion  to  the  whole  number  used,  precisely  as 
would  a  bank-note  of  the  same  denomination,  and  therefore 
in  virtue  of  conventional  and  not  intrinsic  value.  The  bar- 
ter value  of  the  metal  not  demonetized,  as  compared  with 
the  other,  at  once  changes,  according  to  the  extent  of  the 
demonetization,  but  the  value  of  the  coined  units  of  both 
metals  remain  exactly  as  before  and  may  possibly  never 
change  at  all,  because  the  compensating  incidents  before  al- 
luded to,  to  which  must  be  added  the  indefinite  but  very  im- 
portant ones  of  bank-notes  and  economy  of  coin,  varying 
as  these  do,  may  prevent  it  entirely.  The  unit  value  of 
pieces  of  silver  and  gold  weighed  and  coined  is  an  average 
resulting  from  the  millions  of  ratios  which  constitute  buying 
and  selling.  Were  these  all  stated,  as  they  cannot  be,  the 
average  result  would  give  purchasing  power  and  price,  with 
mathematical  accuracy.  The  average  of  the  barter  rates  of 
the  metals  for  any  given  period,  on  the  other  hand,  can  be 
stated  with  perfect  accuracy.  The  two  averages  differ  in  all 
respects,  because  one  is  the  result  of  that  tacit  convention 
which  is  the  condition  precedent  to  the  existence  of  the 
other,  and  necessarily  antedates  it.  Money  is  conventional, 
and  the  necessity  for  its  use  is  so  great  that  it  was  developed 
almost  as  naturally  as  language.  Silver  and  gold  were  the 
best  adapted  to  the  use,  and  therefore  were  from  very  early 


GOLD,  SILVER,  AND  OTHER  METALLIC  UNITS.  399 


periods  employed  to  furnish  material.  That  money  is  con- 
ventional is  certain,  because,  unless  it  were  so,  it  never  could 
be  given  a  general  buying  power.  To  have  that  power,  it 
must,  in  the  character  of  abstract  units,  value  what  it  buys, 
and,  localized  in  paper  or  metal,  pay,  by  delivery  either  act- 
ual or  constructive.  The  value  of  each  unit  coin  is,  ab- 
stractly stated,  an  integral  part  of  all  the  coin  existing. 
Every  sale  is  a  valuation  by  ratio,  perfected  by  mutual  de- 
liveries of  the  units  (localized  in  the  paper  or  metal,  and 
placed  in  the  denominator  of  the  ratio  of  price)  to  the 
seller,  and  the  delivery  of  the  valued  goods  to  the  buyer. 
Were  this  not  so,  the  use  of  bank-notes  as  valuing  and  pay- 
ing units  would  never  have  been  developed.  There  is  no 
double  barter  in  the  case.  Single  barter  between  the  metals 
(silver  and  gold)  used  as  money  antedates  their  use  as 
money.  This  barter  exchange  between  the  metals  as  bull- 
ion is  supposed  to  follow  them  in  their  character  of  units  of 
money  when  exchanged  for  merchandise,  thus  giving  rise  to 
double  barter,  as  an  improvement  upon  single  barter.  This 
is  a  fallacy  which  has  hitherto  passed  for  truth  in  the  sci- 
ence of  money,  and  made  it  a  science  of  contradictions.  It 
is  not  absolutely  but  only  accidentally  true,  that  the  bullion 
in  a  coin  is  worth  as  much  as  the  coin  itself.  The  average 
barter  rate  between  silver  and  gold  in  London,  since  the 
late  demonetizations,  shows  the  resulting  barter  gain  in 
gold,  and  barter  loss  in  silver.  Gold  valued  in  silver  has 
risen,  and  silver  valued  in  gold  has  fallen.  The  former  has 
risen,  on  the  average,  above  the  former  par  seven  and  one 
half  per  cent.,  and  the  latter  has  fallen  seven  and  one  half 
below  it,  but  gold  has  not  gained  one  per  cent,  in  England 
in  unit  value  as  money,  nor  has  silver  lost  one  per  cent, 
in  unit  value  as  money  elsewhere  ;  and  possibly  it  never 
may.  It  has  lost,  therefore,  only  as  the  commodity  or  raw 
material  to  make  money  units.  The  only  barter  possible 
is  that  which  precedes^  but  does  not  constitute  the  use  of 
either  metal  as  money.  It  antedates  that  use  because  the 
use  cannot  exist  without  it.  When  a  piece  of  metal  is 
coined,  its  value  in  any  given  case  is  determined  by  three 


400 


POLITICAL  ECONOMY. 


ratios :  first,  the  total  number  of  units  it  adds  to  the  exist- 
ing total;  secondly,  the  total  circulation  (number  of  ex- 
changes) going  on  within  certain  periods  upon  the  average, 
—  which  depends  very  much  upon  whether  prices  are,  in  the 
country  of  coinage,  in  the  rising  or  falling  scale ;  and  thirdly, 
local  causes  of  variation.  These  are  highly  complex  ele- 
ments ;  those  of  the  barter  exchange  between  metals  are 
simple.  It  is  not,  then,  a  matter  of  conjecture,  but  absolute 
certainty,  that  gold  and  silver  in  coin  are  not  exchanged,  as 
merchandise  for  merchandise  :  it  might  be  said,  if  the  pre- 
mises are  true,  to  be  mathematically  certain. 

For  any  nation  which,  through  direct  or  indirect  demone- 
tization of  silver,  has  ceased  to  employ  it  any  longer  except 
for  subsidiary  uses,  to  establish  its  free  coinage  again  at  this 
time  must  be  the  result  of  entire  ignorance  of  what  money 
really  is.  The  United  States  cannot  do  it  until  after  a  return 
to  convertibility,  and  then  it  is  possible  it  may  not  be  at- 
tempted, and  if  attempted  it  may  be  abandoned.  The  time 
will  probably  come  when,  the  true  nature  of  money  being  un- 
derstood, a  general  remonetization  of  silver  and  gold,  by  all 
the  nations  of  Europe  and  the  United  States,  will  be  brought 
about  by  treaty.  Until  then  no  nation  should  establish  its 
free  coinage  alone. 


CHAPTER  XX. 


FALLACIES   ARISING  FROM   THE   REDEMPTION   OF  CUR- 
RENCIES. 

There*  is  no  fallacy  that  has  done  so  much  to  mask  from 
even  the  strongest  understandings  the  actual  facts  resulting 
from  bank  loans  in  England  and  the  United  States,  as  the 
fallacy  which  I  will  call  Fallacy  No.  2,  which  results  from 
the  theory,  or  rather  the  almost  universal  impression,  that 
gold  represents  or  is  worth  a  certain  amount  of  labor  which 
was  required  to  obtain  it  ;  but  that  bank-notes  and  bank 
credits  do  not.  The  fallacy  which  I  call  No.  1,  and  which 
precedes  the  second,  asserts  that  bank-notes  possess  no  in- 
trinsic value,  and  so  are  not  properly  money  ;  yet,  inas- 
much as  it  is  evident  that  they  take  the  place  of  so  much 
gold,  and  are  called  money,  theorists  are  compelled  to  admit 
that  they  must  be  what  everybody  calls  them  —  money. 
When  it  comes  to  the  bank  credit,  there  is  still  another  fal- 
lacy to  encounter,  resulting  from  the  first,  but,  unfortu- 
nately, the  understanding  is  not  aided  here  by  the  use  of  a 
word  ;  theorists  call  it  a  credit,  and  therefore  no  matter 
what  else  it  may  be,  it  is  only  a  common  credit  after  all ; 
and  the  understanding  is  prevented  from  perceiving  that 
even  if  units  of  what  is  called  credit  are  circulated  by  trans- 
fer, in  place  of  large  sums  in  bank-notes,  it  is  precisely 
the  same  thing  as  if  a  like  amount  in  bank-notes  labeled 
with  the  depositor's  name  were,  in  all  cases  when  credits 
are  transferred  by  checks,  re-labeled  with  the  name  of  the 
new  depositor  ;  notes  being,  in  such  cases,  by  supposition, 
always  kept  to  the  amount  of  deposits.  Adam  Smith  says 
that  in  his  time,  after  bank-notes  had  taken  the  place  of 
three  quarters  of  the  gold  and  silver  formerly  used,  the 

26 


402 


POLITICAL  ECONOMY. 


dealers  kept  large  sums  by  them  in  paper,  which  was  mostly 
confined  to  wholesale  transactions,  and  circulated  from  one 
dealer  to  another.  It  is  precisely  the  same  thing  now,  ex- 
cept in  its  effects,  where  transfers  of  credit  are  made  through 
banks :  the  credit  is  a  power  to  draw  for  *so  many  bank- 
notes, or  for  so  much  gold.  Now  the  first  fallacy  in  order 
is  Fallacy  No.  1,  that  bank-notes  are  not  money  in  reality, 
because  they  possess  no  intrinsic  value  represented  by  an 
equivalent  amount  of  labor ;  can  only  be  called  money  in 
obedience  to  common  usage ;  and,  in  point  of  fact,  have  noth- 
ing more  to  do  with  raising  prices  than  bank  credits ;  and 
that  bank  credits  have  no  more  to  do  with  prices  than  any 
other  kind  of  credits  ;  so  that,  after  all,  it  is  only  a  question 
of  words :  bank-notes  and  bank  credits,  say  the  theorists, 
have  no  effect  as  such  on  prices.  This  is  Mr.  Mill's  theory, 
and  that  of  his  followers.  Both  these  fallacies,  after  all,  re- 
solve themselves  into  one  :  gold  and  silver  have  intrinsic 
value  as  commodities,  and  are  money  ;  all  forms  of  credit  are 
without  intrinsic  value  ;  they  pay  by  set-off,  and  are  not 
money.    This  is  the  whole  case,  stated  in  a  few  words. 

Now  if  gold  and  silver  have  intrinsic  value,  because  they 
cost  a  certain  amount  of  labor,  the  equivalent  of  a  certain 
quantity  of  commodities,  so  has  the  credit  for  all  practical 
purposes  in  the  hands  of  the  holder,  because  it  cost  the 
same ;  and  the  bank  or  the  government  has  the  disposal  of 
an  amount  of  commodities  equaling  the  amount  of  notes  is- 
sued, and  the  first  seller  at  hand  will  honor  and  acknowl- 
edge the  present  holder's  right  to  them. 

The  intrinsic  value  of  a  gold  dollar  or  sovereign,  as  com- 
pared with  a  note  for  like  amount,  is  that  value  which  would 
remain  in  it  if  demonetized  universally.  That  demoneti- 
zation might  take  place  by  common  consent  of  all  nations 
signified  in  a  binding  manner.  The  result  would  be  a  loss 
to  the  unfortunate  holders  of  probably  seventy-five  per  cent, 
or  more  of  the  present  value  of  the  metal ;  but  the  demon- 
etization of  paper  would  not  convert  it  into  anything  intrin- 
different  from  what  it  was  before  :  the  demonetization 


FALLACIES  ARISING  FROM  REDEMPTION  OF  CURRENCIES.  403 


would  in  fact  leave  it  precisely  what  it  was  before,  —  a  claim 
against  the  issuer,  whether  government  or  bank,  for  the  same 
amount ;  and  it  may  be  said,  with  the  most  rigorous  accu- 
racy, that  the  holder  possesses  through  the  paper  that  amount 
of  intrinsic  value,  because,  if  he  loses  it,  and  it  is  at  the  same 
time  lost  to  everybody  else,  through  being  destroyed  or  not 
found,  he  h^s  no  title  or  claim  against  anybody.  He  has  lost 
the  document  that  proves  his  title  to  receive  and  use  that 
amount,  either  of  gold  or  commodities  produced  by  labor.  It 
is  the  sole  evidence  that  he  is  entitled  to  everything  the 
whole  nation  or  the  bank  is  able  to  procure  for  him  to  that 
amount.  The  title-deed  to  property,  the  mortgage,  the  stock 
certificate,  the  note,  and  the  bill  of  exchange,  are  only  evi- 
dences of  title,  but  for  all  practical  purposes  they  are  prop- 
erty to  the  amount  they  will  bring  in  the  market,  where 
title  to  property  passes  with  them.  They  may  and  ought  to 
be  for  all  practical  purposes  (and  money  and  exchanges  are 
eminently  practical)  considered  as  being  (what  they  really 
are)  property  itself,  because  the  property  they  denote  passes 
symbolically  through  them  ;  and  hence,  being,  as  they  are, 
treated  as  wealth  and  sources  of  income  in  taxation,  the  bal- 
ance of  debt  ought  to  be  deducted  in  all  assessments,  in  order 
to  avoid  double  taxation  where  capital  and  not  income  is 
taxed,  as  generally  happens.  For  all  practical  purposes, 
then,  the  demonstration  is  complete,  that  a  dollar  note  has 
seventy-five  per  cent,  intrinsic  value  in  excess  of  a  gold  dol- 
lar, when  the  note  is  at  par. 

But  there  is  a  fallacy  in  the  premises  similar  to  the  one 
we  have  just  laid  aside  which  must  be  eliminated  :  govern- 
ments at  this  day  would  not  demonetize  gold  without  fair 
notice,  which  would  retire  it  into  the  national  coffers  in  ex- 
change for  the  substitute :  and  what  then  ?  The  loss,  in- 
stead of  being  private,  would  be  national,  and  not  only  na- 
tional but  universal,  extending  over  the  commercial  world,  — 
an  enormous  loss  of  between  three  and  four  thousand  mill- 
ions of  dollars.  But  there  is  still  another  fallacy  to  elimi- 
nate (we  have  been  entrapped  by  the  old  fallacy  of  intrinsic 
value  again)  :  there  is  no  real  loss  :  the  value,  in  the  charac- 


404 


POLITICAL  ECONOMY. 


ter  of  purchasing  power,  is  extinguished  in  the  gold  as  money, 
and  the  value  extinguished  is  carried  over  to  and  redeemed 
by  the  substitute,  which  may  or  may  not  have  an  intrinsic 
value  as  a  commodity,  like  gold.  There  is  no  loss  at  all  by 
this  demonetization,  as  there  was  none  by  the  demonetization 
of  the  paper.  What  was  supposed  to  have  intrinsic  is  thus 
redeemed  by  something  which  has  only  conventional  value. 

If  we  are  to  have  any  science,  we  must  abandon  this  the- 
ory of  intrinsic  value,  sacrificing  it  (if  that  indeed  be  possi- 
ble) to  the  real  fact  that  everything  is  money,  and.  has  a 
value  as  money,  that  circulates  as  such,  the  community  be- 
ing guarantor  ;  that  is  to  say,  its  government  being  bound  to 
take  away  the  possibility  of  loss  to  the  holders  by  due  notice 
in  case  of  demonetization,  if  the  money  has  only  a  national 
circulation  and  is  coined  by  government.  If  international, 
however,  that  government  commits  a  wrong  that  monetizes 
or  demonetizes  any  metallic  substance  without  an  interna- 
tional conference.  Upon  this  subject,  if  the  real  equities 
were  understood,  governments  are  as  much  bound  to  act 
jointly,  or  at  least  give  long  notice  of  single  action  in  ad- 
vance, as  any  one  nation  is  so  bound  to  its  subjects  or  citi- 
zens. Want  of  notice,  however,  in  the  latter  case,  is  not  so 
essential,  because  the  currency  would  consist  of  paper  which 
would  suffer  probably  no  depreciation. 

Hence  we  see  it  is  an  old  fallacy  to  suppose  that  redemp- 
tion of  any  kind  of  currency  is  anything  more  than  a  local  or 
general  exchange  of  one  kind  for  another,  in  order  to  effect 
the  general  purpose  of  exchange  of  commodities,  and  to  limit 
production  by  consumption. 


CHAPTER  XXL 


PEEMIUM  ON  GOLD  AND  SILVEE. 

The  value  of  gold  and  silver  being  conventional,  and  the 
field  of  convention  being  the  commercial  world,  these  metals 
moreover  being  highly  useful  in  the  arts,  it  is  not  unreason- 
able that  a  premium  should  be  paid  for  gold,  even  when 
purchased  with  government  legal-tender  notes  which  are  not 
convertible  into  coin. 

In  the  United  States  gold  has  borne  a  premium  for  more 
than  fifteen  years.  The  demand  for  use  in  the  arts  might 
be,  and  undoubtedly  has  been,  an  element  in  the  premium  ; 
but,  independently  of  that  element,  the  law  which  requires 
duties  to  Ije  paid  in  gold  would  of  itself  be  likely  to  create 
a  premium.  During  the  late  civil  war  in  the  United  States 
the  enormous  premium,  and  the  enormous  variations  of  pre- 
mium, were  the  measure  of  the  doubts  and  opinions  of  specu- 
lators and  of  capitalists  in  respect  to  the  final  result,  to  a 
considerable  extent,  and  of  the  demand  for  gold  coin  on  the 
part  of  those  who,  also  entertaining  doubts,  wanted  coin  to 
hold. 

In  England  during  the  wars  following  the  French  Revolu- 
tion, and  after  the  suspension  of  payments  by  the  bank,  the 
government  needed  gold  to  send  abroad  to  pay  troops  and 
furnish  subsidies  to  allies  ;  and  this  demand  raised  the  pre- 
mium. On  the  other  hand,  in  the  late  Franco-Prussian  war, 
notwithstanding  the  enormous  issues  of  inconvertible  paper 
by  the  Bank  of  France,  the  premium  was  nominal  only,  and 
rose  but  slightly  when  the  government  was  performing  the 
remarkable  feat  of  remitting  five  thousand  millions  of  francs 
in  payment  of  the  military  fine.  Therefore  it  is  abundantly 
clear  as  matter  of  fact,  independently  of  the  demonstrations 


406 


POLITICAL  ECONOMY. 


heretofore  given,  that  no  gold  or  other  metal  in  the  shape  of 
coin  is  a  standard ;  neither  is  it  a  commodity :  it  has  been 
called  a  standard,  because  it  is  supposed  to  be  a  commodity, 
but  it  cannot  be  a  commodity  because  as  money  it  has  the 
same  effect  on  price  as  a  bank-note,  and  no  more  :  the  bank- 
note is  but  a  unit  when  placed  in  the  denominator  of  the 
ratio  of  price,  and  a  gold  coin  is  no  more.  Were  it  a  real 
commodity,  possessing  value  by  reason  of  its  intrinsic  quali- 
ties alone,  it  would  be  a  standard,  and  the  premium  paid  in ' 
inconvertible  paper  money  would  show  the  measure  of  de- 
preciation of  the  latter  in  point  of  conventional  value,  or  pur- 
chasing power  as  asserted  by  Mill.  On  the  contrary,  the 
purchasing  power  of  a  pound  of  gold  in  coin  between  the 
years  1857  and  1861,  before  the  late  civil  war  in  the  United 
States,  was,  on  the  average,  at  least  forty  per  cent,  greater 
than  its  average  purchasing  power  between  1861  and  1873 
in  the  same  country.  The  average  premium  during  the  lat- 
ter period  was  no  indication  of  the  amount  of  depreciation  in 
purchasing  power  of  the  inconvertible  which  had  taken  the 
place  of  convertible  paper,  because  the  depreciation  neces- 
sarily embraced  all  money.  The  average  premium  during 
the  war  was,  however,  in  all  probability,  an  indicator  to 
some  extent  of  the  actual  difference  in  this  respect  between 
the  currency  as  it  was  and  as  it  would  have  been  if  con- 
vertible. The  coincidence,  nevertheless,  was  accidental  only, 
and  may  be  stated  thus  :  The  discount  on  the  inconvertible 
currency  in  exchange  for  gold,  during  the  war,  arose  from 
the  demand  for  conversion  into  gold,  by  reason  of  doubts 
in  respect  to  the  result,  and  this  discount  was  on  the  average, 
incidentally^  about  equal  in  amount  to  the  loss  in  purchas- 
ing power  the  paper  currency  had  undergone  by  reason  of 
overissue  and  non-convertibility.  This  high  premium  came 
to  an  end  at  the  close  of  the  war.  Viewing  the  period  of 
the  war  from  its  commencement  in  1861  to  the  spring  of 
1877,  embracing,  as  it  does,  twelve  years,  and  calling  the 
average  premium  for  the  period  twelve  per  cent.,  gold  must 
have  lost  in  conventional  value  in  the  United  States,  as  com- 
pared with  the  period  of  four  years  preceding  the  war,  and 


PREMIUM  ON  GOLD  AND  SILVER. 


407 


with  average  prices  in  France  and  England,  at  least  forty 
per  cent.  In  like  manner  the  rise  of  prices  under  a  convert- 
ible currency,  by  reason  of  bank  loans,  both  in  England  and 
the  United  States,  relatively  depreciates  gold  in  purchasing 
power  in  a  less  degree,  as  well  as  the  paper  which  is  con- 
vertible into  gold.  The  same  may  be  said  of  silver.  Sup- 
pose one  thousand  Mexican  dollars  worth,  at  least,  as  much 
as  one  thousand  American  gold  dollars  in  London,  and  per- 
haps more  before  the  demonetization  of  silver  was  begun  by 
Germany,  to  have  been  sold  for  gold  coin  in  London  in  1870. 
The  gold  coin  could  have  been  immediately  invested  in  Eng- 
land, for  the  ordinary  comforts  of  life,  to  forty  per  cent, 
better  advantage  than  on  the  average  in  the  United  States, 
all  other  differences  allowed  for.  Notwithstanding  all  this, 
a  large  amount  of  gold  remained  in  the  United  States,  and 
a  much  larger  amount  would  have  remained,  had  not  the 
interest  on  the  public  debt  of  the  United  States  for  the  most 
part,  and  the  debt  itself,  been  made  payable  in  gold.  The 
price  of  bullion,  and  the  purchasing  power  of  money  coined 
from  it,  in  one  country,  do  not  therefore  always  regulate  or 
control  its  purchasing  power  in  another :  prices  are  fixed 
locally,  and  the  value  of  bullion  converted  into  standard 
money,  in  one  country,  does  not  establish  or  regulate  the 
prices  of  commodities  in  other  countries.  The  purchasing 
power,  which  is  the  ordinary  name  for  conventional  value 
of  coin  used  as  money,  varies  locally,  more  or  less,  but  chiefly 
because  all  paper  and  credit  money  has  the  same  effect  on 
prices  as  metallic  money.  Were  there  no  money  but  gold 
and  silver  coin,  and  no  banks,  active  commerce  and  free  trade 
would  bring  about  an  equilibrium  to  a  great  extent  between 
the  conventional  values  of  gold  or  other  metal  used  as  money 
everywhere  ;  but  inasmuch  as  paper  or  credit  money  cannot 
be  carried  abroad,  and  its  purchasing  power  used  there, 
while  its  necessar}^  effect  at  home,  under  present  conditions, 
is  to  raise,  depress,  and  vary  prices,  the  consequence  is,  that 
gold  coin  itself  varies  in  purchasing  power  with  other  money. 
In  commodities  of  international  commerce,  therefore,  valued 
in  gold  for  the  most  part,  the  price  for  any  time,  everywhere, 


408 


POLITICAL  ECONOMY. 


is  their  lowest  price  in  any  commercial  country,  added  to  the 
cost  of  importing  them,  including  profits  ;  and  the  average 
price,  setting  aside  fluctuations  in  demand  and  supply,  and 
regarding  only  the  price  as  varied  by  different  currencies,  is 
the  average  of  the  purchasing  power  or  conventional  value  of 
gold  in  each  commercial  country. 

Under  any  and  all  circumstances,  the  relative  value  of  one 
gold  coin,  as  compared  with  another,  and  of  a  gold  coin  as 
compared  with  a  silver  coin,  is  a  matter  of  relative  weight ; 
relative  purchasing  power  or  conventional  value  requiring  to 
be  fixed  in  some  manner,  and  no  other  method  of  adjust- 
ment than  that  of  weight  being  possible.  The  division  of 
all  bullion,  therefore,  into  coin,  the  price  of  silver  bullion  in 
gold  and  of  gold  bullion  in  silver  coin,  are  but  the  necessary 
conditions  of  the  manufacture  of  the  metallic  material  of 
money  into  units,  and  the  adjustment  of  their  relative  pur- 
chasing powers  in  the  abstract ;  it  is  the  providing  of  the 
means  by  which  the  conventional  process  of  circulathig 
money  is  rendered  possible  ;  the  paper  unit,  if  convertible, 
and  the  gold  unit  of  the  same  denomination,  having  the 
same  purchasing  power. 

The  result  produced  by  banks,  and  their  paper  and  credit, 
is,  that  the  paper  performs  the  functions  of  circulation  very 
largely  —  the  bank  credit  being  a  power  to  use  the  reserve  ; 
gold  goes  into  reserve  extensively,  and  might  be  largely  dis- 
posed of  as  merchandise.  Were  it  otherwise,  gold  would  be 
distributed  and  circulated  as  money  throughout  the  commer- 
cial world  altogether,  in  proportion  to  and  in  harmony  with 
commerce,  as  in  France.  It  is  so  distributed  now  to  a  con- 
siderable extent,  but  the  distribution  is  varied,  not  only  by 
commerce,  but  the  degree  to  which  the  use  of  bank-notes  and 
deposits  diminishes  the  amount  required  by  each  country. 
This  is  called  economizing  gold  ;  but  it  is  under  our  system 
of  banking  the  means  of  bringing  on  banking,  commercial, 
and  industrial  crises.  Given  the  circulation  of  metal,  or  of 
metal  and  paper,  and  the  rise  of  prices  depends  solely  upon 
the  number  of  money  units  in  the  first  place,  and  in  the 
second  place  upon  the  number  of  times  they  can  be  loaned 
to  a  producer,  be  he  manufacturer,  merchant,  railroad  con- 


PREMIUM  ON  GOLD  AND  SILVER. 


409 


tractor,  contractor  for  municipal  improvements,  or  in  any 
other  sense  a  producer.  It  is  immaterial  what  is  the  charac- 
ter of  the  money,  whether  paper  or  metal,  provided  the 
amount  to  be  circulated  remains  the  same  in  point  of  num- 
ber of  units,  with  like  grade  of  purchasing  power.  If  the 
number  of  these  units  of  like  grade,  used  to  pay  for  equal 
quantities  of  labor  and  material,  be  in  one  country  metallic 
and  in  another  paper  witli  the  same  circulation,  the  ratio  of 
variation  in  prices  must  necessarily  be  the  same  in  the  one 
as  in  the  other.  In  England  the  circulation  is,  with  the  ex- 
ception of  say  twenty  millions  pounds,  metallic,  or  with  metal 
behind  it,  pound  for  pound.  The  deposit  and  discount  bank- 
ing system  is  in  full  movement  there ;  possibly  as  far  as  it  is 
practicable  to  carry  it,  but  probably  it  might  be  extended 
somewhat  farther.  In  the  United  States  the  system  has 
been  constantly  extending,  and  may  be  considered  as  ap- 
proximating its  possible  maximum.  In  the  United  States, 
however,  there  is,  even  when  paper  money  is  convertible,  but 
very  little  metal  in  actual  circulation.  On  the  whole,  to 
every  one  hundred  dollars  of  bank-notes,  or  every  one  hun- 
dred dollars  of  bank  credits,  which  are  equivalent  powers  to 
actually  put  in  circulation  a  like  amount  of  bank-notes  or 
gold,  or  save  putting  them  in  circulation  by  means  of  what 
may  be  called  the  plan  of  consolidated  reserves  and  clearing, 
there  is  a  smaller  amount  of  coin  than  in  England  ;  and  in 
this  manner  nominally  less  money  in  England,  and,  through 
expansion  of  volume,  more  money  in  the  United  States,  is 
required  to  pay  for  a  given  amount  or  quantity  of  production. 
The  larger  the  amount  of  coin  (in  reserve  and  in  circulation) 
there  is,  on  the  average,  to  a  given  amount  of  money  circu- 
lated in  any  country,  the  lower,  so  far  as  the  totals  of  money 
can  have  any  effect  relatively,  in  making  prices  higher  or 
lower,  must  the  range  (not  the  ratio  of  variation)  of  prices 
be ;  for  the  total  amount  of  coin  that  can  be  circulated  at 
any  time*  in  a  country  like  France  is  the  total  amount  that 
can  be  obtained  already  mined,  coined,  and  within  reach ; 
but  the  total  amount  of  bank-notes  and  metal  that  can  be 
put  in  circulation  is  the  total  of  loans  that  the  banks  can 
make  and  keep  out ;  and  there  is  no  limit  to  the  issue  but 


410 


POLITICAL  ECONOMY. 


a  banking  crisis,  because  there  is  no  other  limit  to  the  cir- 
culation. The  real  difference  between  a  metallic  and  a  con- 
vertible bank-note  circulation,  where  neither  is  duly  limited 
by  gold  under  a  deposit  and  discount  bank  system  fully  de- 
veloped, is  shown  by  the  fact  that  the  only  advantage  the 
founders  of  the  Bank  of  England  procured  for  that  great  pro- 
ducing and  commercial  country,  in  changing  the  system  of 
the  Bank  of  England  as  it  was  before  to  what  it  was  after 
1844,  consisted  in  making  the  range  of  prices  less.  They 
did  not  establish  a  paper  circulation  varying  like  coin,  in  the 
sense  that  France  has  one.  In  England,  as  well  as  in  the 
United  States,  prices  periodically  go  up  and  periodically  go 
down,  with  an  immense  degree  of  variation  in  all  things  per- 
taining to  the  relative  necessaries  and  needs  of  civilized  life  ; 
in  the  absolute  necessaries  of  life  there  is  comparatively  less 
variation :  the  grand  causes  of  demand  and  supply  make  the 
difference.  As  they  vary  up,  more,  and  as  they  vary  down, 
less  money  is  put  in  circulation  by  the  agency  of  the  banks, 
because  in  the  face  of  that  downward  variation  more  cannot 
possibly  be  circulated.  Mr.  Thomas  Tooke,  F.  R.  S.,  pub- 
lished his  Thoughts  and  Details  on  the  high  and  low  prices 
of  the  thirty  years  from  1793  to  1822,  shortly  after  the  latter 
date.  He  intended  by  his  tables  of  prices  to  prove  as  matter 
of  fact  the  proposition,  that  prices  rose  and  fell  independ- 
ently of  the  increase  of  bank-notes  issued  by  the  bank  dur- 
ing that  period ;  and  that  the  premium  on  metal  rose  and 
fell  also  without  regard  to  the  note  issues  of  the  bank,  and 
showed  only  the  difference  between  the  foreign  and  home 
prices  of  imported  merchandise  ;  that  while  there  was  there- 
fore no  rise  of  prices  from  the  bank  issues,  metal  itself  rose 
in  price  from  causes  altogether  independent  of  bank  issues. 
The  bullion  party,  on  the  other  hand,  contended  that  prices 
had  risen  in  consequence  of  the  increased  bank  issues,  and 
that  the  premium  on  metal  did  not  indicate  the  true  amount 
of  the  rise,  but  much  less.  Mr.  Tooke  was  rig^it  in  his 
opinion  that  the  premium  on  metal  did  not  arise  from  the 
issues  of  bank-notes  by  the  Bank  of  England ;  this  nega- 
tive proposition  has  been  practically  demonstrated  within  the 
last  seven  years  by  the  enormous  issues  of  the  Bank  of 


PREMIUM  ON  GOLD  AND  SILVER. 


411 


France.  The  bullionists,  on  the  other  hand,  were  right  as 
to  the  fact  of  average  rise  of  prices  of  domestic  products,  as 
Tooke  himself  was  forced  to  admit.  Both  parties,  however, 
the  anti-bullionists  on  whose  side  Tooke  wrote  as  well  as 
the  bullionists,  were  wrong  as  to  the  operative  cause  ;  neither 
of  them  knew  what  it  was.  Inconvertibility,  increased  is- 
sues, and  increased  circulation  by  the  agency  of  the  banks, 
furnished  the  conditions,  and  the  premium  on  gold  arose 
perhaps  somewhat  from  these  causes  and  somewhat  from 
demand  for  hoarding,  but  chiefly  from  the  demand  for  metal 
to  be  carried  or  remitted  abroad  :  the  price  of  foreign  mer- 
chandise, being  reckoned  and  paid  in  metal,  was  necessarily 
shown  by  the  cost,  premium,  and  duties,  as  has  been  the  case 
in  these  United  States  for  the  last  fifteen  years.  Gold  and 
foreign  goods,  even  when  the  latter  were  subject  to  con- 
siderable duty,  were  frequently  the  cheapest  articles  in  the 
market.  On  the  whole,  the  difference  between  prices  under 
a  purely  metallic  circulation,  uncontrolled  by  banks,  and  a 
metallic,  a  convertible,  or  an  inconvertible  circulation,  con- 
trolled by  banks  of  deposit  and  discount,  lies  chiefly,  if 
not  wholly,  in  steadiness.  If  prices,  through  inconvertible 
paper,  or  deposit  and  discount  banking,  or  to  a  much  more 
limited  degree  as  to  some  articles,  personal  credit,  are  car- 
ried up  above  average,  a  commercial  crisis,  local  or  general, 
of  some  kind,  carries  them  as  much  below  as  they  had  been 
carried  above  average.  Metal,  on  the  other  hand,  while 
having  only  its  natural  circulation,  even  when  supplemented 
by  bank-notes  to  some  extent,  as  in  France,  cannot  be  ob- 
tained in  the  usual  course  of  exchanges,  nor  borrowed  in 
sufficient  amounts  to  invest  to  a  very  great  extent  in  labor 
and  materials,  whose  product  will  not  sell ;  if  sales  cannot 
be  made,  the  work  must  stop.  Therefore,  under  such  a 
system  of  money,  the  progressive  improvements  of  machinery 
which  are  all  the  time,  and  preeminently  in  the  United 
States,  making  less  labor  supply  a  given  product,  are  unable 
to  increase  and  intensify  a  glut  or  want  of  harmony  in  pro- 
duction ;  the  extra  labor  not  needed  is  forced  at  once  into 
other  fields  before  a  national  crisis  intervenes. 


CHAPTER  XXIL 


VARIATIONS  IN  BANK-NOTE  CIRCULATION. 

Banking  properly  means  the  business  done  by  banks  of 
deposit  and  discount :  nevertheless,  by  usage  it  includes  the 
business  of  issuing  notes  intended  to  circulate  as  money,  and 
these  notes  are  money  because  they  are  so  called ;  and  they 
are  so  called  because  they  have  not  only  a  purchasing  power 
through  the  credit  of  the  issuer,  but  also  a  paying  power; 
they  are  the  written  debt  of  a  banker  payable  in  coin  on  de- 
mand :  money  on  deposit  over  and  above  reserve  consists  of 
"  inscribed  "  banker's  debt,  evidenced  by  book  entries,  and, 
if  no  money  is  withdrawn,  transferable  by  check  for  the 
most  part  in  commercial  centres  through  the  clearing  house, 
and  for  the  remainder,  of  coin  and  notes  paid  out  on  checks. 
The  two  kinds  of  banker's  debt  are  the  same  in  effect  as 
to  supplementing  and  economizing  gold ;  the  former  trans- 
ferring or  circulating  commodities  or  merchandise  chiefly  at 
wholesale,  the  latter  at  retail ;  and  when  obtained  by  the 
holder  on  a  bank  loan,  whether  from  a  commercial  or  sav- 
ings bank,  debt  is  employed  usually  in  the  payment  of  labor, 
that  is  to  say  in  production  and  not  in  distribution.  It  is 
almost  entirely  through  the  unduly  expanded  circulation  of 
the  written  by  means  of  the  inscribed  debt,  and  the  total 
inability  of  banks  and  their  customers  who  receive  loans  in 
bank-notes  —  that  is  to  say  producers,  manufacturers,  con- 
tractors, and  adventurers  —  to  stop  their  loans  at  the  right 
point,  and  thus  balance  production  of  commodities  by  con- 
sumption, that  cycles  of  redundant  and  inharmonious  produc- 
tion, ending  in  a  crisis  more  or  less  prolonged,  have  occurred 
periodically  in  England  and  the  United  States  for  some  time 
past.   Most  writers  upon  money  —  notably  Mill  and  Price  — 


VARIATIONS  IN  BANK-NOTE  CIRCULATION.  413 


have  mucli  to  say  upon  "  circulation,"  or  the  movement  of 
banker's  debt  in  the  shape  of  bank-notes,  and  therefore  of 
sales  or  distribution  of  commodities,  and  but  little  of  pro- 
duction ;  and  thus  they  are  unable  to  explain,  or  rather  leave 
unexplained,  the  cause  of  banking  and  industrial  crises. 

The  old  theory  demonstrated  by  so  many  writers  before 
them,  that  there  can  be  no  overproduction,  which,  though 
true,  is  true  only  in  the  most  abstract  sense,  has  been  taken 
by  them  for  granted  ;  but  the  producing  or  manufacturing, 
and  the  distributing  or  mercantile,  and  also  the  banking  com- 
munity, have,  as  I  believe,  come  to  the  conclusion  within  a 
few  years  past  that  there  may  be  very  great  overproduction 
or  redundant  production,  and  that  this  is  not  a  co-factor,  not 
a  co-efficient,  with  anything  else  in  producing,  but  the  sole 
immediate  cause  of  such  crises. 

This  is  a  great  point  gained,  when  the  men  in  whose  hands 
lies  the  remedy  —  if  remedy  there  be  —  for  a  great  evil,  the 
magnitude  of  which  is  past  calculation,  have  agreed  as  to 
what  is  the  cause.  It  is  too  much,  perhaps,  to  say  that  these 
men  have  agreed,  but  there  is  a  considerable  portion  of  the 
reflecting  men  who  have  so  agreed.  Mr.  Price  says  that 
the  true  crisis  is  a  destruction  of  means,  a  diminution  of 
wealth  ;  that  wealth  has  perished  in  unproductive  consump- 
tion. To  "practical"  men  these  assertions  do  not  convey 
the  whole  truth.  The  greater  part  of  the  overproduction 
everywhere,  and  preeminently  in  the  United  States,  is  of  such 
kind  that  the  things  produced  will  all  be  wanted  at  some 
time,  but  they  have  been  produced  too  fast.  The  railroad 
iron,  timber,  road-beds,  and  rolling  stock,  constituting  the 
railroads,  will  nearly,  if  not  quite,  all  be  wanted  in  time  ;  they 
are  not  unproductive  entirely,  for  most  of  them  pay  some- 
thing over  running  expenses,  and  would  pay  therefore  some 
interest  on  their  debentures,  and  in  many  cases  some  divi- 
dends, were  it  not  for  the  enormous  cost  of  construticon. 
Under  a  sound  monetary  system  many  of  them  would  not 
have  been  built  so  soon,  and  some  would  not  have  been  built 
at  all ;  or  at  least  not  built  until  there  was  a  greater  de- 
mand for  them  ;  but  by  far  the  larger  part  would,  as  I  be- 


414 


POLITICAL  ECONOMY. 


lieve,  pay  if  their  capital  and  debts  were  reduced  one  half. 
The  remainder  would  then  represent  what  they  ought  to 
have  cost  under  a  sound  monetary  system.  Again,  the 
"  crisis"  has  developed  a  large  redundancy  of  woolen  cloths, 
cotton  prints,  furniture,  lumber,  and  building  materials,  and 
the  redundancy  appeared  clearly  after  the  bank  panic  of 
1873,  although  there  were  signs  of  it  before  that  time.  In 
many  articles,  in  the  production  of  which  no  redundancy  ap- 
peared for  some  time  after  1873,  it  has  appeared  since :  the 
latter  phenomenon  arises  in  part  from  the  fact  that  at  the 
turn  of  the  tide  in  1873  a  redundancy  existed  and  would 
have  continued,  even  if  all  classes  of  consumers  had  contin- 
ued to  consume  at  the  same  rate  they  had  been  for  some 
time  consuming  ;  but  after  large  bodies  of  consumers,  who 
had  been  laborers  or  producers  themselves,  were  turned  out 
of  employment,  their  ability  to  consume  was  taken  away  in 
great  measure  at  the  same  time  with  their  ability  to  pro- 
duce :  and  their  inability  to  consume,  added  to  the  decrease 
in  consumption  of  other  classes,  has  helped  to  continue  the 
redundancy.  Thus  we  have  redundancy,  prior  to  1873,  of 
production  as  against  consumption  of  all  classes,  and  since 
that  time  increased  economy  of  consumption  in  all  classes, 
and  in  some  loss  of  ability  to  consume  beyond  the  bare  nec- 
essaries of  life,  operating  together  as  co-factors  to  intensify 
and  prolong  the  redundancy.  Increased  economy  in  the  con- 
sumption of  foreign  goods,  shown  by  imports,  and  in  the 
consumption  of  domestic  goods,  demonstrates  then,  not  only 
that  we  are  making  great  savings  to  offset  former  extrava- 
gance through  the  classes  who,  though  still  continuing  to 
produce,  have  economized  their  consumption,  but  also  the 
further  fact  that  much  of  this  apparent  saving  consists  in 
the  non-consumption,  not  of  those  who  are  able  to  consume 
but  are  at  the  same  time  induced  or  compelled  to  economize, 
but  of  those  who  can  hardly  be  said,  as  compared  with  their 
consumption  in  the  period  of  progressive  production  and  ex- 
pansion before  1873,  to  consume  at  all.  In  other  words,  we 
have  had  on  a  national  scale  overproduction,  or  redundant 
«  production  of  those  articles  not  necessary  to  sustain  life,  and 


VARIATIONS  IN  BANK-NOTE  CIRCULATION.  415 


therefore  pertaining  only  to  artificial  or  civilized  life,  as 
compared  with  those  articles  which  all  consume,  and  must 
always  consume  in  the  same  average  quantities  in  order  to 
sustain  life.  Of  these  latter  articles,  although  there  may  be 
as  to  some  occasionally  a  temporary  glut,  there  cannot  be 
an  overproduction,  because  the  annual  production  is  nearly 
balanced  by  the  annual  consumption,  and  the  production 
and  consumption  increase  in  harmony  with  the  increase  of 
population.  In  countries  where  the  limit  of  production  has 
been  nearly  reached  in  agriculture  as  now  carried  on,  im- 
portations must  make  up  the  deficiency.  The  production, 
then,  of  these  staples  of  existence  is  the  basis,  and  the  in- 
exorable limit,  of  all  other  production,  and  so  of  population. 
The  United  States  may  continue  to  produce  everything  re- 
quired for  the  artificial  wants  of  civilization  until  the  limit  of 
pvoduction  (through  agriculture)  is  reached ;  and  further,  so 
long  as  they  take  the  hazard  of  finding  foreign  markets  for 
their  manufactures,  and  find  them.  If  they  find  them  not, 
their  capital  and  population  are  at  a  stand  and  progress  no  far- 
ther. England  has  taken  that  hazard  and  largely  succeeded, 
but  the  outlook  is  not  promising,  and  unfortunately  her  pro- 
ductive powers,  like  those  of  her  hitherto  great  customer  the 
United  States,  instead  of  being  left  to  regulate  themselves 
by  the  inexorable  law  before  mentioned,  have  been  arti- 
ficially stimulated,  and  are  now  suffering  the  resulting  col- 
lapse which  extended  to  both  countries.  The  cause  in  both 
countries  lies  in  the  banking  system,  causing  a  redundant  pro- 
duction through  redundancy  of  paying  power  applied  to  labor 
through  bank-notes  and  coin,  and  perhaps  in  part  the  instru- 
mentality of  small  checks.  The  producing  power  resulting 
from  this  paying  power,  and  ending  in  redundant  production, 
was  carried  in  both  countries  to  an  excess  which  has  stopped 
at  the  inexorable  limit,  —  production  to  meet  artificial  wants 
in  excess  of  the  production  of  the  absolute  necessaries  of  life 
in  the  two  countries,  and  in  those  with  which  they  respect- 
ively trade. 

As  the  production  of  absolute  necessaries  cannot  be  stimu- 
lated to  a  point  in  excess  of  population,  and  as  the  produc- 


416 


POLITICAL  ECONOMY. 


tion  of  things  to  satisfy  artificial  or  civilized  wants  is  now 
on  all  hands  admitted  to  be  in  excess  of  population,  it  fol- 
lows that  it  is  equally  in  excess  of  the  production  of  absolute 
necessaries.  Redundancy  of  goods  can  only  come  from  re- 
dundant production  ;  redundant  production  from  redundant 
labor  applied  in  any  given  department  of  industry  ;  redun- 
dant labor  from  redundant  money  applied  and  used  in  that 
department ;  and  redundant  money  from  redundant  bank 
loans,  because  through  bank  loans  in  the  first  instance  is  the 
money  obtained,  v.  Redundancy  of  money  in  any  particular 
department  of  industry,  or  in  any  particular  place,  as  shown 
in  the  analysis  of  redundancy,  ends  in  a  crisis,  bankruptcy 
more  or  less  extensive,  fall  of  prices,  and  inability  to  make 
sales.  It  was  caused  in  Germany  of  late  through  the  money 
and  circulating  capital  furnished  by  the  French  indemnity, 
and  the  multiplication  of  banks.  Berlin  began  to  look  like 
a  city  of  palaces,  and  labor  doubled  in  price  ;  but  all  this 
has  come  to  an  end,  inflicting  losses  through  the  misapplica- 
tion of  productive  energy  beyond  the  figures  of  the  indem- 
nity, and,  morally  speaking,  losses  that  cannot  be  estimated. 
France,  in  opposition  to  England,  presents  the  case  of  a 
country  whose  production  is  in  equilibrium.  She  has  great 
productive  energies,  and  in  respect  to  the  inexorable  limit 
to  all  other  existing  in  agricultural  production,  she  is  some- 
times slightly  on  one  side  of  the  line  and  sometimes  on  the 
other ;  and  as  she  must  have  arrived  very  nearly  at  the  limit 
of  agricultural  production,  and  her  other  production  is  not 
in  excess -r- as  she  has  no  monetary  and  industrial  crises  of 
her  own,  and  suffers  only  indirectly  from  those  of  other 
countries  through  international  commerce,  —  it  follows  that, 
although  a  country  possessing  the  soundest  monetary  and 
industrial  condition  of  any  country  in  Europe,  she  has  arrived 
very  nearly  at  the  limits  of  population ;  and  such  seems, 
from  her  statistics,  to  be  the  case.  If  M.  Wolowski  and  his 
friends  could  have  induced  the  French  people  to  overcome 
their  prejudices,  and  establish  and  give  custom  to  savings  and 
commercial  banks  after  the  English  and  American  pattern, 
they  would  have  given  a  new  impetus  to  production  put 


VAKIATIONS  IN  BANK-NOTE  CIRCULATION.  417 

population  again  on  the  increase ;  introduced  Frenchmen  to 
an  acquaintance  with  panics,  and  banking  and  industrial 
crises,  and  disturbed  the  present  and  the  future  annual  dis- 
tribution of  the  precious  metals  ;  changing,  for  the  three 
countries,  the  existing  relative  proportions  of  one  half  to 
France,  five  sixteenths  to  England,  and  three  sixteenths  to 
the  United  States,  to  one  third  each  for  the  three  countries  ; 
producing  an  advance  in  prices,  equivalent  to  the  effect  of  a 
very  large  increase  in  the  production  of  the  mines. 

27 


CHAPTER  XXIII. 


FALLACY  IN  THE  USE  OF  THE  TERM  BANK  DEBT,  OR  BANK 

CREDIT. 

The  founders  of  the  Bank  of  England,  Britisli  and  Amer- 
ican writers  generally,  and  Mill  and  Professor  Bonamy  Price 
in  particular  (because  the  writings  of  the  latter  two  have 
probably  had  a  good  deal  of  influence  in  the  United  States 
as  well  as  England,  from  their  extensive  and  thorough  discus- 
sions of  the  subject  of  credit),  are  mistaken  in  denying  that 
bank  credit  is  money,  or  rather,  in  afiirming  that  it  is  only 
the  equivalent  of  mercantile  credit  to  the  depositor.  It  is 
only  a  question  of  words,  I  admit,  but  I  have  just  shown  how 
great  a  fallacy  is  concealed  in  the  word  Intrinsic ;  and  there 
is  undoubtedly  as  great  a  fallacy  in  the  use  of  the  word  Credit, 
or  what  is  on  the  other  side  the  equivalent  of  credit.  Debt. 
Credit  to  the  depositor  is  debt  to  the  bank.  If  a  depositor 
buys  anything,  or  pays  a  debt  by  assigning  or  transferring 
his  credit  by  means  of  a  check,  the  credit  is  the  same  as  gold 
coin,  because  it  puts  gold  coin  in  circulation.  The  credits 
of  people  in  the  hands  of  a  merchant,  and  the  latter's  notes, 
might,  it  is  true,  be  used  as  money  in  the  same  way  as  well 
as  bank-notes  ;  but  if  any  credit  by  entry  or  note  could  have 
an  actual  circulation  as  money,  it  would  raise  prices  precisely 
as  the  same  amount  of  gold  would,  but  not  in  the  character 
of  credit^  and  therefore  only  as  money.  A  fallacy  lies  in  sup- 
posing, or  taking  it  for  granted,  that  units  of  credit  in  bank 
cannot  be  money.  They  cannot  act  in  both  capacities  at  the 
same  time,  certainly ;  but  whenever  they  accomplish  full  pay- 
ment by  virtue  of  a  general  use  or  conversion,  they  will  be 
truly  money,  as  bank-notes  are. 

The  existence  of  this  fallacy  is  the  reason  why  inflations 


REDEMPTION  OF  CURRENCY. 


419 


take  place  in  prices  to  such  an  extent  as  to  allow  an  overstock 
to  occur ;  not  through  actual  increase  in  the  total,  but  in  the 
circulation  of  money.  Whoever  has  a  deposit  has  a  command 
to  that  extent  over  the  field  of  production  by  loaning  bank 
credit,  or  bank-notes,  or  by  using  the  money  himself  in  pro- 
duction ;  and  it  has  never  been  possible  hitherto,  either  in 
England  or  the  United  States,  to  circulate  credits,  notes,  and 
gold,  by  means  of  loans  and  checks,  out  of  this  immense  con- 
solidated fund,  so  fast,  that  they  might  not  have  been  circu- 
lated much  faster  had  not  the  overstock  raised  interest  and 
cost  of  living  so  high,  and  carried  the  locking  up  of  capital 
in  overstock  so  far,  that  a  crisis  came  long  before  the  great- 
est abstractly  (not  practically)  possible  circulation  had  been 
reached.  It  is  immaterial  whether  we  suppose  notes  and 
gold,  or  only  the  power  to  circulate  them,  to  pass.  The  fal- 
lacy lies  in  taking  it  for  granted  that  there  is  something 
intrinsic  in  gold,  or  gold  and  silver,  which  neither  bank-notes 
nor  bank  credits  can  possess,  when  bank-notes,  although  mere 
debt,  circulate  as  gold,  and  take  the  place  of  so  much  gold. 
This  fallacy  must  be  got  rid  of  before  we  can  have  a  science 
of  money  and  circulation,  the  complements  of  production,  ex- 
change, and  consumption,  and  before  we  can  place  the  cause 
of  overstock  on  scientific  ground. 

The  next  step  will  be  to  find  out,  if  possible,  a  remedy ; 
and  here  is  an  important  fact  to  notice :  the  popular  idea 
that  either  metal  or  a  "  metallic  basis  "  is  requisite  for  a  cur- 
rency, in  order  to  prevent  variations  in  prices,  is  sound ;  but 
why  it  is  requisite  people  are  not  aware.  It  is  requisite, 
chiefly,  to  prevent  an  overstock  ;  it  is  useful  because  it  is  dis- 
tributed over  the  commercial  world,  is  comparatively  inde- 
structible, and,  finally,  in  case  of  loss  of  productive  power, 
loss  of  crops,  etc.,  in  any  country,  it  goes  so  far,  either  per- 
manently or  temporarily,  to  other  countries.  Above  all 
other  considerations,  it  cannot  be  produced  so  as  to  make 
money  units  increase  in  excess  of  production  and  consump- 
tion, that  is  to  say,  of  commerce ;  if  it  could  be,  and  were 
produced  in  excess,  it  would  be  unsuitable,  either  as  money 
or  the  regulator  of  the  volume  of  money  units  of  any  other 


420 


POLITICAL  ECONOMY. 


kind  of  money.  Its  superior  utility,  then,  and  its  adaptation 
to  the  end  sought,  are  the  reasons,  and  the  only  reasons,  why 
it  is  better  than  any  other  money  in  either  of  the  capacities 
named.  There  is  less  danger  of  loss  by  it  simply  from  the 
fact  that  banks  and  governments  are  more  likely  to  fail  than 
the  whole  commercial  world  ;  one  government  is  more  likely 
to  fail  than  all  governments,  and  the  elements  will  not  be 
likely  to  destroy  the  metal  as  they  might  paper.  The  same 
principle,  however,  underlies  all  currencies.  If  gold  were 
universally  demonetized,  and  silver  universally  monetized, 
all  governments  would  be  bound  to  redeem  the  gold  with  sil- 
ver, —  not  to  prevent  national,  but  individual  loss,  —  because 
the  nation  could  suffer  no  loss  by  any  demonetization  ;  and 
if  an  international  currency,  issued  in  certain  proportions  in 
paper  by  all  commercial  governments,  and  increasing  and 
diminishing  in  perfectly  exact  proportion  to  international 
and  national  commerce  (even  gold  cannot  maintain  that  ex- 
act proportion),  were  possible,  as  it  is  not,  and  apparently 
cannot  be,  governments  might  then  be  called  upon  to  redeem 
gold  or  silver  with  paper.  Hence  it  follows  that  inasmuch 
as  the  utility  of  gold  as  money,  and  therefore  as  a  limitation 
of  any  other  currency,  consists  simply  in  the  fact  that  it  in- 
creases annually  in  the  shape  of  coin  more  nearly  in  propor- 
tion with  the  increase  of  commerce  than  any  other  substance 
we  know  of  could  ;  if  gold  is  piled  up  in  banks  in  reserves 
in  uncertain  quantities;  can  be  bought  as  merchandise  and 
taken  from  one  country  to  another  ;  and  if  a  demand  for  it 
by  any  one  country  is  always  for  gold  as  merchandise  and 
not  as  money,  it  is  so  far  subserving  no  such  useful  purpose. 
A  want  of  harmony  in  production  is  the  result,  because  the 
regulated  currency  of  credits  and  notes  is  not  in  any  true 
sense  convertible.^  The  want  of  harmony  shows  itself  in  an 
excess  of  articles  only  relatively  as  against  those  absolutely 
necessary. 

1  See  Banker's  Magazine,  May  and  June  Nos.,  1875,  pp.  876,  963. 


CHAPTER  XXIV. 


COMPLEX  NATURE  OF  MONEY. 

Of  all  subjects  involving  human  action,  that  of  money 
is  the  most  complex.  To  comprehend,  to  investigate,  and 
to  demonstrate  the  leading  truths  of  a  complex  subject,  re- 
quires a  careful  examination  of  all  the  elements  whose  sep- 
arate or  combined  action  produces  the  phenomena.  Money- 
is  the  grand  power  which  lies  at  the  very  foundation  of  all 
society,  because,  without  it,  production,  the  source  of  all 
human  progress,  and  commerce,  the  distribution  of  all  prod- 
ucts, would  come  to  an  end.  The  exceeding  complexity  of 
the  subject,  strange  as  it  may  seem,  is  the  very  reason  why, 
by  some  writers  upon  money,  it  is  declared  to  be  very  sim- 
ple. There  are  so  many  angles  of  observation  from  which 
it  may  be  viewed,  that  the  result  has  been  that  the  obvious 
and  noticeable  angle  has  been  supposed  to  be  the  only  one ; 
the  remote  and  masked  angles,  to  be  found  only  on  careful 
and  rigorous  analysis,  not  being  discovered.  This  defect  of 
sight  gives  rise  to  theory,  and  the  theory  hitherto  is  all  one 
and  the  same.  That  theory  is,  that  gold  and  silver  coin  are 
commodities,  and  that  a  bank  deals  in  credit  which  is  like 
the  credit  of  tradesmen  or  merchants.  This  theory  irresist- 
ibly leads  to  the  conclusion  that  when,  in  point  of  fact,  gen- 
eral prices  rise  by  money  put  in  circulation  through  bank 
loans,  they  rise  by  excessive  buying  on  credit,  and  fall  be- 
cause the  investments  are  unproductive. 

This  theory  I  admit  to  be  true,  inasmuch  as  it  contains  an 
important  part  of  the  truth  ;  but  I  affirm  it  to  be  also  false, 
inasmuch  as  the  premises  upon  which  it  is  founded  assume 
to  contain  all,  while  they  contain  only  a  part  of  the  truth. 
The  total  of  bank  credit  in  England  is  the  difference  be- 


422 


POLITICAL  ECONOMY. 


tween  the  total  of  bank  reserve  and  the  total  of  bank  debt. 
This  is  also  the  sum  total  of  bank  debt  over  and  above  im- 
mediate or  cash  means  of  payment,  as  well  as  of  bank  credit 
belonging  to  depositors  over  and  above  the  cash  which  be- 
longs to  them  in  the  reserve.  Viewing  deposits  as  bank 
debt  only,  the  reserve  may  be  said  to  belong  to  the  banks ; 
viewing  them  as  a  deposit  only,  it  belongs  to  the  depositors. 

When  clearings  take  place  without  the  appearance  of  a 
single  coin,  and  when  in  the  same  bank  transfers  of  credit 
are  made  from  A.  to  B.  by  check  without  clearing,  they  look 
like  the  debiting  and  crediting  on  mercantile  books  ;  but 
the  appearance  is  deceptive.  Mercantile  credits  and  debits, 
where  no  money  passes,  arise  from  sales  of  merchandise  on 
time  ;  bank  loans  are  loans  of  purchasing  and  paying  power, 
to  buy  all  merchandise  already  finished  and  ready  for  con- 
sumption, or  labor  and  materials.  Bank  checks  transfer  to 
sellers  the  right  to  money  in  bank  in  payment  for  merchan- 
dise sold,  or  to  banks  in  payment  of  loans.  In  the  latter  case 
there  is  a  return  to  the  bank  of  the  purchasing  power  loaned. 
Now  credit  is  giving  time  on  sale  of  merchandise,  and  it  can 
exist  without  money ;  payment  can  only  be  made  with  com- 
modities or  money.  But  full  payment  is  made  without  the 
use  of  commodities,  and  with  something  in  bank ;  therefore, 
if  what  seems  to  pass  in  such  cases  is  that  which  really 
passes,  bank  credit  thus  used  is  either  a  substitute  for  money 
or  money  itself.  It  cannot  be  the  former,  because  a  reserve 
is  always  kept ;  and  when  there  is  not  money  enough  in  the 
reserve  to  cover  the  balance  called  for  the  bank  fails.  What 
really  passes,  therefore,  must  be  the  money  in  the  reserve. 
The  money  in  the  reserve  passes  quite  as  effectually  in  clear- 
ings as  when  it  is  handed  over  in  gold  sovereigns  and  silver 
crowns,  half  crowns,  and  shillings.  If  credit  passes  in  the 
first  case,  it  must  in  the  second.  But  I  have  said  there  is 
truth  in  the  assertion  that  credit  is  used  in  some  form.  It 
would  be  more  correct  to  say  that  there  is  an  approximation 
to  the  truth  only,  because  the  real  credit  in  the  case  lies  in 
the  manner  in  which  the  money  loaned  is  expended,  leaving 
for  an  indefinite  period  an  expansion  of  bank  credit  (in  other 


COMPLEX  NATURE  OF  MONEY. 


423 


words,  deposits)  created  by  the  use  of  the  money  loaned 
while  the  reserve  is  not  proportionally  increased,  but  is,  on 
the  contrary,  diminished.  This  is  the  real  credit  in  the  case, 
and  all  of  it;  and  it  is  a  credit  productive  of  momentous 
consequences.  What  is  needed  in  respect  to  an  exceedingly 
complex  subject  like  this  is  absolute  precision  ;  but  it  is  one 
not  found  in  the  treatises  upon  production  and  exchange. 
In  fact,  precision  is  impossible  without  rigorous  analysis.  I 
affirm,  therefore,  that  the  total  of  bank  debt  over  and  above 
reserve  is  the  amount  loaned  to  consumers  in  advance  of 
possible  production,  and  to  producers  in  advance  of  possible 
consumption  over  and  above  the  loans,  and  therefore  the 
consumption  and  production  which  would  take  place  in  the 
absence  of  banks.  Here  lies  the  real  credit  in  the  case.  I 
will  first  demonstrate  the  proposition  in  a  general  form,  and 
then  by  a  rigorous  analysis.  To  pay  the  total  of  bank  loans 
would  require  a  sale  of  services,  commodities,  or  merchan- 
dise to  productive  consumers,  equal  in  value  to  the  total  of 
bank  loans.  The  money  being  paid  into  the  reserve  would 
cause  the  total  of  reserve  and  deposits  to  coincide,  and  bank 
debt  over  and  above  reserve  would  be  abolished.  Hence 
payment  of  all  bank  loans  would  abolish  all  bank  debt,  and 
at  the  same  time  the  fallacy  that  it  is  like  other  credit.  The 
contraction  in  this  case  would  come  from  circulation  outside 
of  bank  and  payment  into  bank  reserve.  The  active  cause  of 
the  contraction  would  be  sales  for  cash.  The  production  of 
the  merchandise,  when  it  took  place,  required  in  advance 
payments  of  cash  for  labor  and  material,  and  the  cash  came 
through  bank  loans,  and  therefore  through  a  credit  draft  on 
bank  reserve.  But  this  contraction  does  not  affect  depos- 
itors, except  as  to  the  amount  of  the  grand  total  of  deposits. 
Their  loans  which  they  make  to  producers  and  consumers  are 
independent  of  those  made  by  the  banks,  except  those  they 
make  out  of  interest  and  profits  paid  over  in  advance  of 
consumption.  The  banks  are  only  the  instruments  by  which 
their  loans  are  made.  The  payment  of  money  on  loans  made 
by  banks,  either  directly  to  consumers  or  indirectly  by  dis- 
counting the  paper  of  retail  merchants  given  to  wholesale 


424 


POLITICAL  ECONOMY. 


merchants  or  jobbers,  requires,  as  a  first  condition,  sale  of 
products  by  the  retail  merchants  to  buyers.  But  a  contrac- 
tion of  the  bank  expansion  caused  by  these  loans  takes  place 
annually  ;  therefore  progressive  expansion  must  come  from 
increasing  volume  of  merchandise  not  sold,  and  hence  not 
consumed,  and  from  that  only. 

DEMONSTRATION  BY  ANALYSIS. 

A  more  complete  and  satisfactory  demonstration  is  fur- 
nished by  analysis.  The  real  and  only  bank  credit  given 
borrov^ers  is,  first,  as  original  producers,  who  produce  by  the 
aid  of  bank  loans  out  of  bank  reserve  for  practically  indef- 
inite periods,  faster  than  they  can  sell  for  consumption ;  and 
secondly,  as  consumers,  who  in  the  character  of  buyers  at 
retail  purchase  in  advance  of  production,  and  sell  their  prod- 
ucts at  certain  seasons  immediately  after  marketing  crops. 
The  buyers  of  the  crops  by  the  aid  of  bank  loans  take  the 
place  in  bank  of  the  jobbing  or  wholesale  merchants,  who 
are  thus  enabled  to  this  extent  to  pay  their  loans.  The  ex- 
pansion of  circulation,  that  is  to  say,  the  putting  money  in 
circulation,  by  means  of  bank  loans  made  to  wholesale  mer- 
chants, jobbers,  or  commission  merchants,  on  discount  of  bills 
or  notes  given  by  retail  merchants,  who  sell  directly  to  con- 
sumers, three  fourths  of  whom  are  agriculturists,  is  retired 
for  the  most  part  annually  by  sales  of  crops  :  the  annual 
contraction  nearly  balances  the  annual  expansion. 

The  progressive  annual  expansion  of  the  production  of 
relative  necessaries,  over  and  above  this  and  all  other  annual 
consumption,  is  the  grand  cause  of  the  progressive  rise  of 
general  prices  until  a  reaction  takes  place,  a  commercial, 
industrial,  and  banking  crisis  comes,  and  the  cycle  is  com- 
pleted. 

To  comprehend  and  follow  the  analysis  I  am  about  to 
make,  the  true  nature  and  functions  of  money  must  be  first 
understood,  or  at  least  assumed  for  the  present  and  until 
the  analysis  is  completed.  The  value  of  money  is  conven- 
tional, that  is  to  say,  so  long  as  the  money  is  used  as  money : 
money  is  not  an  end,  but  means  to  an  end ;  and  that  end  is 


COMPLEX  NATURE  OF  MONEY. 


425 


primarily  the  exchange  and  consequent  distribution  of  the 
fruits  of  labor  and  capital  after  they  are  produced.  Hence 
the  end  of  money  is  the  exchange  and  distribution  of  all 
things  which  can  be  exchanged,  exclusive  of  itself.  It  is 
therefore  absolutely  impossible  for  money  to  be  a  commodity 
while  it  is  money  :  conventional  value  cannot  be  real  value. 
Hence  metallic  money  must  be  divided  into  units  of  weight, 
the  conventional  value  of  which  must  be  directly  proportioned 
to  weight ;  and  when  there  are  two  metals  in  use,  the  con- 
ventional value  of  the  units  of  one  metal  must  be  to  those  of 
the  other  for  equal  weights  inversely  as  the  weights  of  the 
respective  masses  of  each  metal  in  coin.  This  is  the  law, 
upon  the  supposition  that  the  two  metals  (and  it  would  be 
the  same  if  there  were  three  or  more)  are  equally  and 
everywhere  material  for  money  and  freely  coined.  The  law 
varies  as  the  use  and  the  distribution  of  the  metals  as  money 
vary. 

Money  is,  therefore,  necessarily  a  unit  of  valuation,  pur- 
chase, and  payment.  The  title  to  the  unit,  and  the  purchas- 
ing power  which  accompanies  it,  pass  by  delivery  of  coin  or 
bank-notes  to  every  successive  holder.  Adam  Smith  com- 
pared money  in  use  to  a  bill  of  exchange  accepted  and  re- 
accepted  by  every  holder,  being  also  an  assignment  of  the 
holder's  right  to  commodities  purchasable  with  the  money. 

This  comparison  is  good,  but,  like  most  comparisons,  im- 
perfect. If  the  reader  is  unable  to  divest  himself  of  the  idea 
that  money  is  a  commodity,  let  him  aid  his  understanding 
by  calling  it  a  substitute  commodity.  Thus,  if  we  suppose 
the  use  of  money  abolished,  and  commodities  exchanged  di- 
rectly for  each  other,  there  can  be  no  exchanges  for  con- 
sumption without  production,  and,  on  the  other  hand,  no 
production  without  exchanges  for  consumption,  except  to  a 
very  moderate  extent.  Occasionally  an  article  may  be  bor- 
rowed to  consume,  and  here  there  would  be  for  the  time 
consumption  by  the  borrower,  in  anticipation  of  his  future 
production  and  delivery  of  a  like  article  to  the  lender.  On 
the  other  hand,  a  producer  might  have  some  accumulation  of 
products  beyond  possible  sales,  and  might  borrow  other  prod- 


426 


POLITICAL  ECONOMY. 


ucts,  such  as  the  necessaries  of  life,  to  a  very  limited  extent, 
in  anticipation  of  future  exchanges  of  his  products  for  those 
necessaries,  and  the  return  of  the  latter  to  the  lender.  This 
excess  of  production  would  be  very  limited,  because  such 
necessaries  could  not  long  be  procured  in  this  way,  and  for 
the  equally  sufficient  reason  that  the  stock  overproduced 
would  immediately  depreciate  through  excess.  General  over- 
production being  impossible,  partial  overproduction  must 
therefore,  on  the  average,  be  impossible  :  the  grand  system 
or  machine  of  exchanges  must  on  short  averages  have  har- 
mony in  its  various  parts.  If  one  man  produces  too  little 
to  meet  the  demand,  and  still  borrows  to  support  himself, 
he  cannot  borrow  long :  if  another  man  produces  more  than 
he  can  find  consumers  to  exchange  with,  but  borrows  from 
them  in  order  to  live  while  he  is  doing  it,  he  cannot  go  on 
producing  to  this  excess  long.  He  must  stop  and  exchange 
what  he  has  already  produced,  even  at  a  loss,  and  borrow 
less,  and  so  produce  less  at  a  time,  in  the  future.  By  so 
doing  he  will  on  the  average  produce  as  much  as  he  could 
before,  and  he  will  do  it  without  loss.  On  the  whole,  under 
such  a  system  of  direct  exchanges  there  would  be  nearly 
uniform  production  and  consumption ;  and  so  the  price  of 
every  commodity  reckoned,  by  way  of  barter,  in  the  com- 
modity for  which  it  is  exchanged  would  be  uniform  and 
steady.  But  let  us  suppose  for  one  moment  that  all  pro- 
ducers under  this  system,  including  the  tillers  of  the  earth 
engaged  in  producing  the  absolute  necessaries  of  life,  can,  in 
consequence  of  the  accumulation  of  capital  and  therefore 
means  of  subsistence,  borrow  freely  all  the  commodities  they 
choose.  An  excess  of  the  necessaries  of  life  is  still  impossi- 
ble, because  population  keeps  even  pace  with  them,  and 
they  are  annually  consumed.  The  producers  of  the  absolute 
necessaries  of  life  are  therefore  not  only  enabled,  but  even 
compelled,  by  selling  all  they  produce,  to  pay  up  annually, 
while  the  producers  of  other  necessaries  are  accumulating 
overstock.  There  is  a  limitation,  however,  to  this  accumu- 
lation, and  it  ends  with  a  sale  of  the  overstock  for  what  it 
will  bring ;  but  before  it  comes  the  exact  amount  of  the 


COMPLEX  NATUKE  OF  MONEY 


427 


overstock  is  indicated  by  the  debt  the  producers  of  it  owe 
to  the  producers  of  absolute  necessaries,  as  shown  by  the 
books  of  the  latter.  This  is  an  expansion  of  production  on 
one  side  only,  and  it  is  also  the  exact  measure  of  the  debt 
due  from  the  producers  of  it  to  their  bankers,  the  producers 
of  absolute  necessaries.  This  debt  has  no  objective  reality, 
any  more  than  ordinary  bank  debt.  It  is  not  the  loans 
themselves,  but  one  of  the  results  of  loans.  Let  us  now  in- 
troduce money  in  the  shape  of  gold  and  silver  coin,  and  call 
it  a  substitute  commodity,  universally  receivable  in  place  of 
one  of  the  two  commodities  heretofore  exchanged  for  each 
other,  and  as  a  substitute  for  it,  and  see  how  exact  is  the 
parallel.  Before  the  introduction  of  money  there  were 
always  two  commodities,  and  each  was  exchanged  for  the 
other,  the  units  of  each  of  the  commodities  being  valued  in 
those  of  the  other.  Precisely  so  is  it  now  with  money  and 
the  commodity  it  is  exchanged  for.  The  units  of  the  substi- 
tute commodity,  money,  value  those  of  the  real  commodity, 
and  those  of  the  latter  the  units  of  money.  But  money 
being  the  universal  substitute,  it  necessarily  follows  that  all 
values,  abstracted  from  the  exchanges  actually  going  on,  are 
expressed  only  in  terms  of  units  of  money,  and  the  real  forces 
in  operation  are  thus  more  or  less  masked.  But  the  substi- 
tute must  be  given  twice  in  exchange  for  a  real  commodity 
before  there  is  evidence  that  two  commodities  have  not  only 
been  produced,  but  are  about  to  be  consumed ;  and  the  ex- 
changes of  the  substitute  commodity  for  labor  are  not  ex- 
changes to  meet  the  wants  of  consumers  until  the  products 
of  the  labor  are  sold.  Prices  are  as  steady  as  they  were 
when  commodities  were  exchanged  directly  for  and  valued  in 
each  other,  if  the  products  of  labor  are  sold  as  soon  as  before. 
And  why  steady  ?  Because  there  is  no  greater  volume  of 
loans,  and  therefore  of  production  on  credit.  But  although 
some  loans  of  money  are  made  there  are  no  banks,  and  the 
money  is  entirely  metallic.  If  there  were  a  perfect  and 
completely  even  distribution  of  wealth  always  existing  nat- 
urally, admitting  its  possibility  and  the  possibility  of  its  con- 
tinuance, there  would  be  no  loans ;  human  progress  would 


428 


POLITICAL  ECONOMY. 


be  impossible,  and  the  social  system  would  stagnate.  But 
such  a  distribution  is  impossible,  and  hence  accumulations  of 
capital  follow.  Increasing  productive  capital  brings  increas- 
ing real  commodities,  and  the  necessary  exchanges  of  these 
for  the  substitute  commodity  money  bring  a  corresponding 
supply  of  the  latter.  The  capitalist  cannot  use  all  the  latter 
in  his  own  consumption,  and  therefore  lends  the  surplus.  To 
whom  does  he  lend  ?  He  can  lend  only  to  those  first  produc- 
ers who  originally  produce  commodities,  or,  what  amounts 
to  the  same  thing,  services  ;  or  to  the  second  producers,  who 
are  merchants,  and  who  are  thus  enabled  to  exchange  the 
substitute  for  the  real  commodity,  and  the  latter  with  the 
consumer  for  the  substitute  commodity  again,  returning  the 
latter  to  the  lender. 

Now  comes  an  expansion  of  production  in  certain  quar- 
ters in  advance  of  production  in  other  quarters.  This  ex- 
pansion of  production  is  absolutely  necessary  for  the  ex- 
pansion of  commerce,  to  an  extent  sufficient  to  satisfy  the 
increasing  wants  of  civilized  man.  It  arises  from  loans  of 
the  substitute  commodity  money  from  the  capitalist,  and  ex- 
changing it  for  labor  and  perhaps  a  real  commodity  in  the 
shape  of  raw  material  previously  produced  by  labor.  Pro- 
duction of  the  absolute  necessaries  of  life  cannot  expand  be- 
yond, or  in  advance,  of  population  ;  that  of  other  necessaries 
can,  but  not,  in  the  absence  of  banks,  to  an  extent  much  in 
advance  of  wants  and  ability  to  exchange,  because  money  and 
commodities  are  distributed  together;  and  hence  the  price, 
or  exchangeable  value  of  the  substitute  commodity  money, 
remains  steady,  because  that,  of  all  other  commodities,  re- 
mains so.  If  the  price  of  the  substitute  commodity  should 
rise,  however,  it  must  make  that  of  all  real  commodities  fall, 
because  it  is  a  universal  substitute  for  all  commodities  ;  if  its 
price  falls,  on  the  other  hand,  it  must  raise  the  price  of  all 
real  commodities  for  a  like  reason.  Being  a  substitute  com- 
modity, exchanged  only  for  the  purpose  of  effectually  dis- 
tributing all  other  commodities,  and  having  no  other  use 
whatever,  it  necessarily  follows  that  as  it  is  never  consumed 
itself,  its  price,  reckoned  in  real  commodities  of  all  sorts,  will 


COMPLEX  NATURE  OF  MONEY. 


429 


depend  upon  the  quantity  of  it  used  to  effect  the  distribution, 
and  not  upon  the  quantity  in  existence.  Real  commodities 
are  not  loaned  now  as  before  when  barter  prevailed,  because 
they  are  wanted  only  at  the  time  they  are  needed  to  con- 
sume;  but  the  substitute  commodity  can  be  loaned  just  as 
often  as  it  comes  back  into  the  possession  of  the  lender.  It 
never  can  come  back  out  of  loan  except  as  it  is  exchanged 
for  commodities  which  are  wanted  for  consumption,  and 
therefore  not  far  in  advance  of  it.  Loans  are  therefore  made 
to  producers^  and  paid  only  by  consumers.  In  the  absence  of 
banks,  and  with  a  metallic  currency,  as  soon  as  the  producer 
has  borrowed  all  the  money  which  is  to  be  had,  he  can  bor- 
row no  more  until  and  as  consumers  pay  him,  and  he  pays 
the  capitalist ;  and  so  thenceforth  his  loans  are  measured  by 
the  demands  of  consumers,  and  this  will  cause  a  regular  flow 
of  the  substitute  commodity  money  into  and  out  of  his  money 
reserve. 

But  with  banks,  if  we  now  suppose  them  to  be  introduced, 
and  to  do  business  as  they  do  in  England  and  the  United 
States,  without  any  definite  limit  beyond  which  none  can 
make  loans  (a  definite  ratio  of  reserve  to  liability  is  the  only 
practical  limit  universally  attainable),  no  such  limitation 
exists,  but  the  loans  are  necessarily  in  an  ascending  scale,  up 
to  a  crisis.  The  current  of  loans  being  continually  and  pro- 
gressively either  in  excess  or  defect  of  the  return  current  of 
payments,  the  substitute  commodity  money  is  being  contin- 
ually exchanged  for  raw  material  and  labor  in  excess  of  con- 
sumption, without  any  possible  limit  but  that  of  a  crisis. 
Take  a  country  of  great  industry  like  China,  where  vast 
amounts  of  the  substitute  commodity,  silver  money,  are  kept 
without  loaning,  and  there  is  no  expansion  of  production  as 
in  France,  where  loans  are  made  by  capitalists.  In  a  coun- 
try like  France,  where  banks  have  not  been  established,  there 
is  no  expansion  of  production  as  in  England  and  the  United 
States,  with  banks  which  make  a  loss  of  deposits  in  one  bank 
through  loans  to  producers  a  foundation  for  loans  from 
another  bank  to  other  producers,  in  consequence  of  the  re- 
sulting redeposit  in  another  bank.    Under  no  other  system 


430 


POLITICAL  ECONOMY. 


of  loans  but  bank  loans,  without  a  regulated  reserve,  is  this 
possible.  Bank  No.  1  loans  to  A.,  and  he  pays  out  the 
money  for  labor  and  pig  iron,  and  produces  iron  bars  or 
rails  :  the  laborers  who  produced,  and  the  sellers  of  pig  iron, 
either  directly  or  indirectly  by  the  agency  of  others,  rede- 
posit  the  proceeds  of  the  loan  in  another  bank,  and  perhaps 
partly  in  a  savings  bank.  The  bars  or  rails  produced  by  the 
loan  remain  unsold  for  cash  ;  but  the  redeposit  of  the  money 
loaned  is  the  immediate  cause  of  another  loan  for  the  same 
purpose  by  bank  No.  2  ;  and  thus,  if  bank  credit  has  been 
increased  through  the  loan  in  bank  No.  1  to  the  amount  of 
ten  thousand  dollars,  it  is  increased  in  bank  No.  2  to  a  like 
amount,  by  redeposit,  before  a  single  bar  or  rail  has  been 
sold  for  cash.  The  permanent  or  indefinite  expansion  of 
what  is  called  credit  in  bank  No.  1  and  bank  No.  2,  there- 
fore, is  not  the  cause^  but  the  effect  of  the  expansion  of  pro- 
duction in  advance  of  cash  sales.  The  credit  on -the  books  of 
the  bank  is  nothing  in  itself,  any  more  than  millions  of  buried 
treasure,  until  used  by  the  borrower  ;  and  the  only  active 
and  real  purpose  for  which  he  can  use  it  is  to  produce,  and 
when  used,  the  important  movement  is  the  production  on 
credit  which  results.  But,  in  order  to  produce,  he  must  pay 
for  labor  and  raw  material ;  and  to  produce  the  raw  material 
in  the  first  instance  requires  also  payment  of  labor.  His 
loans,  therefore,  if  we  trace  them  back  and  subject  the  whole 
process  to  rigorous  analysis,  are  mostly  expended  in  the  shape 
of  money  actually  taken  out  of  the  reserve,  and  paid  out  for 
labor,  and  not  in  the  shape  of  credits  transferred  by  check. 
The  expansion  of  what  is  called,  and  what  I,  for  want  of 
another  word,  call  circulation,  takes  place,  therefore,  by  pay- 
ments of  actual  cash  to  labor,  to  produce  merchandise  that 
largely  remains  unsold  for  an  indefinite  period,  and  by  that 
very  fact  progressively  increases  and  indefinitely  continues 
what  is  called  Bank  Expansion. 

Bank  expansion,  on  the  face  of  it,  is  only  an  increase  of 
bank  debt  by  recorded  drafts  upon  the  reserve.  This  is  the 
surface  view  of  the  process  of  bank  expansion  to  everybody, 
and  the  only  view  of  it  possible  for  those  who  will  neither 


COMPLEX  NATURE  OF  MONEY. 


481 


analyze  nor  follow  analysis.  Analysis  shows  us  that  bank 
expansion  is  impossible  except  as  the  result  of  the  expansion 
of  production  beyond  possible  cash  sales.  Bank  credit  is  the 
result  of  the  expansion  of  production  which  goes  on  outside 
of  banks,  and  which,  in  the  very  nature  of  things,  must  have 
its  limits.  The  efforts  of  all  the  banks  in  the  United  States 
and  Great  Britain  combined  would  be  powerless  at  this  time 
to  .stimulate  production,  and  therefore  commerce,  beyond  its 
present  volume.  There  is  abundance,  and  more  than  abun- 
dance, of  money  in  bank  reserve  in  either  country,  and  the 
elements  of  bank  expansion  are  as  great  as  ever  ;  but  the 
circulation  out  of  bank  still  shrinks  and  contracts  in  volume, 
and  precisely  as  consumption  advances  beyond  production 
the  reserve  is  increased.  The  investment  of  money  loaned,  in 
labor  and  material,  then,  in  order  to  produce,  is  substantially 
the  exchange  of  a  commodity  having  only  conventional  value, 
which  may  also  be  called  a  credit  value,  for  a  commodity 
which  is  not  yet  certain  of  a  market,  and  which  the  producer 
has  only  an  expectation  of  selling.  The  unrestrained,  and 
therefore  unlimited,  power  of  making  such  investments  nec- 
essarily raises*  the  price  of  all  productions,  including  those 
which  are  thus  in  temporary  excess.  In  the  absence  of 
money  loans,  if  loans  could  be  freely  made  in  the  shape  of 
the  necessaries  of  life  from  capitalists,  they  would  act  only 
on  those  necessaries  by  way  of  raising  prices,  and  on  the 
commodities  produced  in  temporary  excess  by  way  of  lower- 
ing prices.  They  would  depress  the  price  of  the  latter  as 
much  as  they  would  raise  that  of  the  former  ;  under  the  use 
of  the  substitute  commodity  called  money,  the  price  of  that 
part  of  the  commodities  in  excess,  whether  sold  to  actual  con- 
sumers or  to  merchants  in  expectation  of  resales,  necessarily 
rises,  as  well  as  that  of  the  necessaries  of  life.  But  when  the 
crisis  comes,  then  the  natural  law  of  depreciation  in  the  com- 
modities in  excess,  as  compared  with  those  not  in  excess  of 
population,  and  therefore  of  consumers,  comes  into  full  play, 
as  we  now,  in  1877,  perceive  to  be  the  case  with  bar  and 
rolled  iron,  cloth,  etc.,  on  the  one  hand,  and  wheat  and  pro- 
visions, on  the  other,  independently  of  the  rise  caused  by 


482 


POLITICAL  ECONOMY 


the  pending  war  in  Europe  and  Asia.  Hence  I  affirm  that 
I  have  demonstrated,  both  directly  and  by  rigorous  analysis, 
that  bank  credit,  as  distinguished  from  money,  has  no  ob- 
jective reality.  Economically  speaking,  it  is  but  the  shadow 
cast  by  that  production  on  credit  which  is  maintained  by 
bank  loans. 

Tlie  real  credit,  in  its  inception,  is  the  exchange  of  the 
substitute  commodity  money,  not  for  a  commodity  intended 
for  immediate  consumption,  but  for  labor  and  raw  material, 
while  the  necessaries  of  life  are  being  actually  consumed  by 
all  the  laborers,  —  first,  those  who  produce,  and,  secondly, 
those  who  work  up  the  material,  —  whose  product  is  not  all 
certain  of  a  cash  market,  while  all  of  the  necessaries  of  life 
are.  The  creation  of  this  unbalanced  product,  in  hope  and 
confidence  and  actual  belief,  through  rising  prices,  of  a  speedy 
market,  is  the  real  credit,  or  rather  production  on  credit, 
which,  as  long  as  it  lasts,  is  the  cause  of  bank  expansion  and 
contracting  reserve,  and  when  it  comes  to  a  violent  end  by  a 
crisis  is  followed  by  bank  contraction  and  expanding  reserve. 
The  enormous  prices  paid  a  few  years  since  for  British  rail- 
road iron  of  poor  quality,  and  for  rolling  stock,'  the  enormous 
discount  on  railroad  debentures,  the  inflations  in  volume  of 
railroad  stocks  without  a  corresponding  increase  of  capital, 
—  if  they  could  now  be  contracted  to  average  figures,  as 
production  and  bank  credits  have  been  and  are  being  con- 
tracted, would  place  many  of  them  on  a  paying  basis.  If 
production  and  wages  could  be  averaged  and  brought  to 
steady  rates  during  the  periods  of  rise  and  fall  in  both,  by 
a  regulation  of  the  use  of  the  substitute  commodity  called 
money,  more  men  would  be  at  the  plow  and  less  at  the  loom 
and  furnace  ;  aggregate  wealth  would  increase  ;  there  would 
be  fewer  great  fortunes,  and  a  state  of  exchange  and  dis- 
tribution more  like  that  of  France  would  be  found  in  the 
United  States,  and  to  a  considerable  extent  in  England. 

WHAT  BANK  CREDIT  MIGHT  BE. 

Because  the  value  of  money  is  altogether  conventional, 
bank-notes  convertible  into  metal  take  the  place  of  metal 


COMPLEX  NATURE  OF  MONEY. 


433 


itself,  and  have  precisely  the  same  effect  as  a  like  amount  in 
metal,  and  are  thus  said  to  economize  the  amount  of  metal 
required  by  precisely  the  amount  of  notes.  In  a  different 
manner,  through  the  use  of  a  series  of  consolidated  reserves 
called  deposits,  the  quantity  of  metal  required  can  be  econ- 
omized to  any  extent,  subject  only  to  one  proviso,  —  that 
metal  enough  shall  always  be  on  hand  to  meet  every  call 
madfe  ;  if  withdrawn  by  check,  it  shall  be  always  redeposited, 
so  as  to  be  on  hand  in  sufficient  amounts  for  that  purpose. 
Such,  with  few  exceptions,  is  the  case,  and  as  a  general  rule 
there  is  a  considerable  surplus  to  spare.  Bank  credit,  as  well 
as  bank-notes,  could  be  used  without  any  reserve  at  all  but 
the  credit  itself.  The  credit  could  be  circulated  by  the  in- 
strumentality of  checks  in  the  character  of  units  of  credit. 
Whatever  can  be  circulated  outside  of  banks  can  be  depos- 
ited in  banks,  for  deposits  can  only  arise  from  circulation. 
In  such  a  case  expansion  in  prices  might  be  carried  farther 
than  with  convertible  bank-notes  or  gold,  although  the  prin- 
ciple would  be  precisely  the  same.  Bank  expansion  is  one 
and  the  same  thing  in  all  cases.  It  is  always  and  every- 
where expanded  production  outside  of  the  necessaries  of  life 
by  the  aid  of  bank  loans.  It  is  expansion  of  production  on 
credit  and  expectation  of  a  market,  under  the  deceptive  influ- 
ence of  an  apparently  rising  scale  of  prices.  Whether  bank 
debt  is  convertible  or  not,  the  expansion  is  one  of  production 
above  average  by  the  use  of  the  circulation  of  money  without 
limit  to  pay  for  labor  or  services  in  respect  to  those  things 
not  absolutely  necessary  to  existence.  If  everybody  could 
conveniently  use  bank  credit  as  money,  and  pay  it  out  by 
check,  —  even  if  the  use  of  metallic  money  were  abolished 
altogether,  —  bank  expansion  and  bank  contraction,  and  the 
effects  of  the  expansion  and  contraction  of  production  in  the 
quarter  just  mentioned,  would  be  the  same  as  now,  because 
if  all  production  were  harmonious  bank  expansion  could  not 
exist. 

Buying,  say  Mill  and  Price,  and  all  the  modern  writers 
upon  money,  is  the  cause  of  ascending  prices,  universally. 
Expansion  of  production,  say  I,  is  the  first  cause  of  the  rise 

28 


434 


POLITICAL  ECONOMY. 


of  general  prices,  and  contraction  of  production  the  first 
cause  of  the  fall  of  general  prices ;  diminished  ability  to  con- 
sume and  diminished  demand  being  effects,  in  the  order 
named,  of  these  causes.  Mere  buying  of  any  one  article  on 
speculation  and  keeping  it  out  of  market  will,  independently 
of  the  cause  named,  raise  the  price  of  that  article,  undoubt- 
edly ;  but  what  I  am  now  examining  is  the  general  move- 
ment of  production  and  prices.  These  writers  are  looking 
at  the  stream  of  distribution  through  commerce.  I  am  look- 
ing at  the  grand  fountain  and  source  of  supply.  Credit  on  a 
general  scale,  no  doubt,  follows  the  increased  credit  which 
moves  production.  Production  and  commerce  are  the  great 
business  of  the  world,  and  in  them  lies  the  original  cause  of 
commercial  crises.  When  they  are  expanding,  —  and  they 
expand  together,  —  credit  of  all  kinds  expands  with  them. 
Town  and  city  lots  rise  in  expectation  of  purchasers ;  rail- 
road stocks  rise  by  reason  of  enlarged  traffic  ;  the  stock  of 
manufacturing  corporations  rises  by  enlarged  and  apparently 
profitable  business.  But  the  collapse  is  inevitable,  and  the 
grand  problem  of  the  time,  demanding  solution  with  every 
recurring  cycle  of  contraction  following  expansion,  is :  How 
to  put  laborers  at  some  employment  where  their  services  will 
always  be  needed  and  their  wages  steady,  and  how  to  pro- 
duce the  relative  necessaries  of  life  abundantly  and  at  the 
same  time  so  steadily  that  they  will  always  be  in  harmony 
with  the  absolute  necessaries.  This  can  be  done,  so  far  as  it 
can  be  done  at  all,  only  by  a  limitation  of  bank  loans  through 
a  regulated  reserve,  as  I  have  demonstrated  in  various  forms 
in  other  chapters.  There  must  be  some  fixed  point  beyond 
which  loans  cannot  go. 

SUMMAEY. 

I  have  thus  demonstrated  that  bank  credit  has  no  inde- 
pendent existence,  and  no  circulation  of  itself.  What  causes 
bank  expansion  is  expansion  of  production  in  certain  quar- 
ters in  excess  of  expansion  of  production  in  other  quarters  ; 
and  what  causes  bank  contractions  is  contraction  of  produc- 
tion.   As  production  expands,  it  necessarily  follows  that 


COMPLEX  NATURE  OF  MONEY. 


435 


rates  of  interest  expand,  and  as  it  contracts,  that  rates  of 
interest  contract ;  and  such  we  find  to  be  the  case  in  point 
of  fact.  Money  may  be  conceived  of  as  a  substitute  for  one 
commodity  in  all  exchanges,  inasmuch  as  it  is  never  wanted 
for  consumption ;  and  in  England  and  the  United  States  it 
forms  a  series  of  consolidated  funds  or  reserves,  belonging  to 
individuals  and  deposited  in  banks,  to  a  large  extent,  while 
all  the  banks  are,  by  their  connections,  virtually  consolidated 
into  one  bank,  having  in  their  vaults  a  large  portion  of  the 
money  capital  of  the  whole  country.  It  follows  that  a  small 
reserve  will  answer  all  calls,  while  the  actual  circulation 
outside  of  the  banks  is  mostly  made  up  of  bank-notes. 
There  is  no  practical  limit  but  a  crisis  to  the  possible  ex- 
pansion of  loans.  The  substitute  commodity  money  is  con- 
stantly returning  through  deposit  into  bank,  after  it  has 
been  loaned  to  pay  for  labor  and  material,  whether  the  prod- 
uct of  that  labor  and  material  can  be  sold  or  not,  and  thus 
becomes  the  source  of  further  loans  and  of  bank  expansion. 
If  the  product  were  sold  as  fast  as  the  money  is  returned  into 
deposit,  an  even  ratio  of  reserve  to  liabilities  would  be  main- 
tained. Because  the  product  progressively  accumulates,  the 
reserve  and  therefore  the  ratio  of  reserve  to  liabilities  pro- 
gressively diminishes.  Until  this  law  is  perceived  and  fully 
understood,  but  little  progress  can  be  made  in  Great  Britain 
and  the  United  States  in  the  knowledge  of  the  science  of 
Production  and  Exchange.  It  is  impossible  for  deposit  re- 
serve to  increase,  as  compared  with  bank  debt,  any  faster 
than  consumption  goes  on.  There  will  be  always  an  increase 
of  what  are  called  deposits,  as  loans  and  therefore  production 
increase,  but  not  of  reserve. 

Were  there  no  loans  of  money,  there  never  could  be  a 
commercial  or  industrial  crisis.  If  loans,  when  made,  were 
never  used  to  pay  either  directly  or  indirectly  for  labor  and 
material,  but  only  for  finished  products  ready  for  the  con- 
sumer, there  could  never  be  such  a  crisis.  It  is  the  exchange 
of  the  conventional  commodity  money  for  labor  and  mate- 
rial, to  produce  things  not  absolutely  necessary  to  existence, 
by  means  of  loans  of  money,  faster  than  these  find  cash 


436 


POLITICAL  ECONOMY. 


buyers,  which  produces  such  crises.  If  every  capitalist  were 
compelled  to  keep  his  money  in  his  own  possession,  and 
could  make  no  loans,  all  the  money  coming  into  his  reserve 
would,  of  course,  come  from  consumers,  and  all  the  money 
paid  out  by  him  would  be  paid  to  producers,  for  the  purpose, 
not  of  enabling  them  to  produce,  but  only  to  enable  him  to 
consume,  to  satisfy  only  his  own  wants  and  that  of  his  de- 
pendents. The  strong  tendency  of  production  outside  of  the 
necessaries  of  life,  increased  by  the  great  improvements  in 
machinery  and  locomotion  of  modern  times,  and  in  England 
and  the  United  States  by  great  energy  and  skill,  to  advance 
be}' ond  the  production  of  absolute  necessaries,  is  not  the  came 
of  excess^  but  one  of  the  causes  which  renders  excess  possi- 
ble. The  loss  which  immediately  follows  excess,  in  point  of 
fact,  is  for  a  time  masked  ;  and  not  only  masked,  but  up  to 
the  time  of  a  crisis  is  made  to  appear  profit,  through  rising 
prices  caused  by  the  excessive  use  of  the  conventional  com- 
modity money  to  pay  for  labor  and  material.  Without  a 
conventional  commodity,  all  exchanges  would  require  two 
real  commodities,  and  there  could  be  no  exchange  of  com- 
modities for  labor  but  to  a  very  limited  extent ;  and  never 
much  beyond  the  immediate  wants  of  the  consumers  of  the 
products  of  that  labor.  The  use  of  the  borrowed  conven- 
tional commodity  money  in  exchange  for  labor,  largely  in 
excess  of  that  limit,  is  of  itself  a  credit^  and,  when  carried  to 
the  point  of  an  industrial  crisis,  an  excess  of  credit,  but  it  is 
a  credit  arising  from  the  use  of  money.  The  prevention  of 
that  excess,  by  stopping  bank  loans  everywhere  at  a  certain 
point,  and  thus  approximating  to  the  steady  prices  of  a  me- 
tallic currency  without  banks,  as  we  see  in  France,  where 
production  is,  on  the  whole,  except  as  indirectly  affected  by 
foreign  countries,  so  evenly  balanced,  is  what  I  have  discussed 
in  various  forms  in  this  book.  The  prevention  will  operate, 
first,  by  stopping  loans  after  a  certain  point;  second,  steady 
and  uniform  prices  will  give  steady  wages  and  harmonious 
production  ;  for,  under  steady  prices,  inharmonious  produc- 
tion is  impossible. 

A  merely  commercial  crisis  may  occur  on  a  large  scale,  as 


COMPLEX  NATURE  OF  MONEY. 


437 


commercial  crises  have  occurred,  no  doubt,  from  the  use  of 
personal  credit  in  respect  to  one  or  more  articles  of  commerce 
in  time  of  peace  ;  it  frequently  occurs  in  time  of  war,  and 
large  amounts  of  private  paper  may  grow  out  of  such  trans- 
actions. In  such  cases,  production  in  the  hands  of  first  pro- 
ducers may  or  may  not  be  more  or  less  stimulated,  and  thus 
intensify  the  glut  and  recoil  of  prices  when  they  arrive,  as 
they  inevitably  will ;  while  consumption,  checked  by  advanc- 
ing prices,  contributes  to  the  same  result.  But  these  com- 
mercial disturbances,  although  serious,  are  not  the  grand 
and  ever  recurring  crises,  such  as  I  have  described,  which, 
through  bank  loans  and  increased  circulation  of  money,  raise 
all  prices,  while  the  expansion  of  personal  credit  through 
sales  of  merchandise  raises  only  the  price  of  that  merchandise. 
Whatever  increases  the  total  circulation  of  money  as  com- 
pared with  the  average  total  of  commodities  actually  distrib- 
uted and  consumed,  raises  the  prices  of  all  those  commodi- 
ties. Hence  the  forcible  disturbance  of  the  distribution  of 
the  precious  metals  in  the  shape  of  coin,  frequently  occurring 
in  war,  as  in  the  time  of  the  Roman  empire,  when  vast  treas- 
ures were  collected  from  vanquished  nations  in  the  shape  of 
fines  and  tribute,  and  of  late  in  Germany,  by  the  remittance 
of  large  sums  from  France,  raises  all  prices.  It  takes  the 
money  from  the  places  where  commerce  has  distributed  it 
and  leaves  it  where  it  ought  not  to  be  distributed.  Such 
distributions  are  a  curse  instead  of  a  blessing.  Where  there 
is  productive  power  to  stimulate,  as  in  Germany,  they  stim- 
ulate it,  but  they  invariably  stimulate  too  much,  and  at  the 
wrong  time.  Advancing  prices,  although  but  a  phantom, 
stimulate  the  energy  of  production,  sometimes  perhaps  ad- 
vantageously. Of  all  the  stimulus  ever  applied  in  this  way, 
the  most  potent  was  that  of  the  bank  and  government  incon- 
vertible paper,  applied  in  the  United  States  for  the  past 
fifteen  years  by  the  gigantic  instrumentality  of  bank  loans. 
In  the  history  of  the  world  production  was  never  so  stimu- 
lated before.  Could  the  war  have  been  carried  on  without 
these  issues,  which  gave  government  credit,  really  at  times 
more  than  fifty  per  cent,  below  par,  the  appearance  of  being 


438 


POLITICAL  ECONOMY. 


at  par  ?  Not  only  this,  but  productive  energy  was  not  stim- 
ulated in  appearance  merely,  but  in  fact.  This  is  the  real 
benefit  derived  in  war  from  the  abandonment  of  metal,  and 
a  resort  to  bank  or  government  issues  of  inconvertible  paper 
when  a  great  national  struggle  is  at  hand.  England  resorted 
to  this  policy  with  enormous  gains  in  productive  power  : 
France  resorted  to  it  in  her  late  war  with  Germany ;  but 
having  no  banks  but  the  Bank  of  France,  with  a  small  de- 
posit (the  socially  conservative  habits  of  the  people  remain- 
ing), the  expansion  of  circulation  and  of  production  was  not 
greatly  stimulated  by  their  instrumentality,  and  the  paper 
was  largely  retired  by  rentes  ;  while  in  England,  before  the 
resumption  of  payments,  the  reaction  from  stimulated  pro- 
duction was  tremendous,  and  is  now  in  the  United  States 
going  on  in  a  still  greater  degree  ;  —  the  enormous  volume 
of  state,  city,  county,  and  town  indebtedness,  adding  in- 
tensity to  the  burdens  and  the  difficulties  of  recovery,  while 
the  vast  army  of  operatives  turned  out  of  employment,  be- 
cause their  work  cannot  be  sold,  presents  a  problem  hitherto 
unsolved,  and  never  before  in  the  history  of  the  United 
States  calling  for  solution.  The  stimulus  to  production 
given  by  the  issue  of  irredeemable  paper  during  and  after 
the  late  civil  war,  and  up  to  1873,  has  led  some  men  of 
thought,  and  one  able  writer  upon  political  economy  in  the 
United  States,  to  urge  the  further  issue  of  such  paper,  not- 
withstanding the  fact  that  vast  sums  are  now  on  hand  wait- 
ing for  borrowers,  who  never  come.  This  is  a  monstrous 
fallacy,  greater  than  that  of  those  who  believe  money  to  be 
a  commodity,  and  bank  credit  to  be  an  objective  reality,  in- 
stead of  the  mere  subjective  result  of  production  on  credit 
expanded  by  the  aid  of  bank  loans.  Money  (scientifically 
viewed)  is  but  a  process  ;  and  when  it  has  been  used  to  ex- 
cess, no  matter  how  much  of  it  may  be  offered,  it  cannot  be 
used  again  until,  the  cycle  of  contracting  production  being 
completed,  the  expanding  one  is  thus  made  ready  to  begin 
anew.  No  power  on  earth  could  now  force  producers,  in  tlie 
United  States  or  England,  to  begin  that  cycle,  because  they 
would  be  not  only  actually,  but  also  apparentlij,  losing  by  it. 


COMPLEX  NATURE  OF  MONEY 


439 


Nobody  wants  or  could  buy  the  increased  product,  should 
they  produce  it,  and  an  increased  issue  of  paper  money,  or  of 
any  other  money,  would  only  raise  the  price  of  the  product 
higher  than  any  consumer  could  pay  for  it.  Should  the 
United  States  be  forced  into  a  war  of  large  proportions,  and 
the  act  for  the  resumption  of  payments  by  the  treasury  be 
repealed,  the  draft  thus  made  upon  the  number  of  the  em- 
ployed as  well  as  the  unemployed,  and  the  increased  con- 
sumption, might  soon  start  production  afresh,  and  raise 
prices  by  increasing  the  circulation  of  money  through  loans  ; 
but  this  would  only  intensify  the  glut  after  the  stimulus  had 
been  stopped.  Of  all  the  would-be  friends,  but  real  foes  of 
the  laborer,  whether  skilled  or  unskilled,  the  worst  are  those 
who  have  taken  up  the  cry  of  more  paper  money,  to  be  issued 
by  the  general  government,  and  the  repeal  of  the  resumption 
act.  What  is  needed,  for  the  United  States,  is  not  to  call 
more  laborers  (whether  they  are  to  be  fed  and  clothed  and 
set  to  work  in  England  or  the  United  States)  to  the  produc- 
tion of  pig  iron,  cloth,  or  building  materials,  but  to  force  the 
surplus  of  them  away  as  soon  as  possible  from  towns  and 
cities  to  the  country  and  the  plow.  What  is  called  protec- 
tection  is  not  protection  while  prices  are  in  a  rising  scale. 
Inconvertible  paper  money,  issued  without  any  limit  assigned 
it  in  advance,  would  be  a  curse  indeed.  As  shown  in  the 
chapter  on  English  Banking,  and  in  this  chapter  and  else- 
where, inconvertible  paper  money,  honestly  issued  without 
any  reserve,  might  maintain  steady  prices  if  production  were 
always  steady  ;  but  as  production  is  not  steady,  the  only  way 
of  using  it  successfully  is  to  limit  its  circulation,  as  well  as 
its  issue,  to  the  probable  total  of  what  it  would  be  if  regu- 
lated in  volume  by  a  fixed  ratio  of  reserve  in  coin.  Because 
production  is  not  steady,  this  paper  currency,  without  metal, 
could  not  give  steady  prices.  Gold  and  silver  are  not  wanted 
for  themselves,  but  to  make  steady  prices,  and  thus  main- 
tain steady  production.  Inconvertible  paper  is  only  tolerable 
when,  in  a  great  national  struggle,  the  production  of  iron, 
of  cloth,  and  of  other  articles  outside  of  absolute  necessa- 
ries, will  bear  stimulus,  and  when  government  credit,  other- 


440 


POLITICAL  ECONOMY. 


wise  apparently  below  par,  is  thus  apparently  carried  to  par, 
or  as  near  to  it  as  possible  ;  and  the  real  loss  of  government 
credit  is  thus  masked. 

In  conclusion,  it  appears  by  the  most  rigorous  analysis 
that  what  is  called  Bank  Credit,  or  Bank  Debt,  under  a  con- 
vertible currency,  is  never  paid  out  as  a  substitute  for 
money :  it  has  no  function  in  exchanges.  If  it  were  really 
used  as  a  substitute,  there  could  be  no  such  thing  as  convert- 
ibility by  means  of  a  reserve.  Convertibility  consists  in 
having  enough  money  at  all  times  in  the  reserve,  whether  it 
consist  of  metal  or  convertible  notes,  to  pay  every  demand 
actually  made  :  whether  actual  deliveries  are  made  out  of  the 
reserve,  or  saved  by  clearing,  is  immaterial.  This  I  have 
shown  to  be  not  probable,  but  certain. 

If  there  were  no  money,  and  if  all  exchanges,  as  well  as 
all  loans,  were  to  still  take  place  as  they  do  with  money, 
the  production  of  pig  iron,  iron  rails  and  bars,  cloth,  and 
building  materials  not  actually  sold,  would  be  written  up  in 
the  books  of  production  of  things  borrowed  (absolute  neces- 
saries of  life),  to  enable  that  production  to  take  place.  Dr. 
by  the  quantity  x :  money  being  introduced,  the  debt  would 
still  stand  the  same,  and  therefore  may  be  also  designated 
by  X,  Banks  being  introduced,  the  debt  stands  at  a;  -}-  Bank 
Loans.  To  eliminate  bank  loans  would  have  the  effect  of 
crediting  production  by  the  amount  of  bank  loans,  which 
would  leave  x  alone ;  and  x  then  represents  nothing  but 
loans  of  metal  or  bank-notes  received  from  producing  con- 
sumers whose  products  have  been  sold.  This  elimination 
comes  by  reducing  the  volume  of  production  by  the  known 
quantity.  Bank  Loans  ;  and  the  effect  is  to  make  the  volume 
of  deposits  and  the  volume  of  reserve  to  coincide,  precisely 
as  they  did  before  bank  loans  were  made.  This  coincidence 
is  the  immediate  effect  of  paying  metal  or  notes  into  the  re- 
serve, and  hence  the  want  of  coincidence  originally  came 
from  taking  metal  or  notes  out  of  it. 

The  expanding  cycle  of  production  through  bank  loans 
begins  where  the  contracting  one  through  bank  loans  ends, 
and  the  contracting  cycle  begins  where  the  expanding  one 


COMPLEX  NATURE  OF  MONEY. 


441 


ends.  Bank  expansion  consists  in  loaning  out  of  the  re- 
serve, and  keeping  in  circulation,  not  that  portion  of  the 
reserve  which  exchanges  commodities  for  consumption,  but 
that  portion  of  it  which  is  not  needed  for  that  purpose.  Rise 
of  prices,  as  already  shown,  depends  directly  upon  the  num- 
ber of  units  of  money  which  are  on  hand,  to  put  into  circu- 
lation, and  the  number  of  times  they  can  be  and  are,  within 
given  periods,  loaned  to  invest  in  production,  for  loans  can 
be  extended  in  no  other  way. 

The  truth  is  that  the  establishment  of  a  fixed  ratio  of  re- 
serve in  metal  to  the  volume  of  bank  debt,  instead  of  the 
fluctuating  one  by  means  of  which  the  metal  in  the  reserve 
is  now  circulated  without  the  limitations  imposed  by  the  act- 
ual exchanges  of  commodities,  because  used  not  only  for  that 
purpose  but  also  for  the  payment  of  labor  in  excess  of  such 
exchanges,  would  utterly  banish  the  idea  that  mere  credit 
exchanges  or  pays  for  commodities.  The  real  credit  in  the 
case  is  the  use  of  depositors'  money  in  excess  of  the  ex- 
changes of  actual  commerce.  This  is  not  all,  for  it  results 
in  the  loan  of  money  in  the  shape  of  profits  and  interest, 
supposed  to  be  earned  by  actual  exchanges,  by  means  of  de- 
positors loaning  money  out  of  a  credit  fund,  supplied  by  the 
credit  fund  of  the  banks. 

The  real  credit,  or  the  real  debt  in  which  banks  deal,  — 
whichever  we  choose  to  call  it,  —  is  the  use  on  their  own 
credit  of  depositors'  money  to  loan  to  customers,  in  order  to 
produce  on  credit  in  excess  of  the  exchanges  depositors' 
money,  in  the  absence  of  all  discounting,  would  show,  and 
the  payment  out  of  interest  and  discount  received  in  excess 
of  those  exchanges,  of  dividends  and  profits,  which,  in  an 
economical  sense,  have  not  been  earned. 


CHAPTER  XXV. 


RELATIVE  VALUES  OF  DIFFERENT  METALS,  AND  COMMOD- 
ITIES OTHER  THAN  METALS,  USED  AS  MATERIAL  FOR 
THE  MANUFACTURE  OF  MONEY  UNITS,  IN  REDEMPTION, 
EXCHANGE,  PURCHASE,  AND  PAYMENT. 

There  are  two  schools  of  opinion  upon  the  subject  of 
relative  value,  as  expressed  in  each  other,  of  the  two  metals, 
gold  and  silver,  out  of  which,  with  perhaps  the  exception  of 
the  short  experiment  of  Russia  in  coining  platinum,  the 
money  units  of  most  nations  have  from  the  earliest  period 
been  manufactured.  One  school,  founding  its  opinion  on 
the  intrinsic  value  of  gold  and  silver  as  commodities,  repre- 
sented by  their  cost  in  labor,  maintain  that  the  relative 
values  of  gold  and  silver,  as  expressed  in  each  other,  fix 
themselves  by  what  may,  I  think,  be  called  a  natural  law  of 
relation,  and  cannot  be  fixed  by  legislation  :  the  other  school 
affirms  that  the  relative  value  may  be  fixed  by  legislation, 
while  the  value  of  either,  relative  to  other  commodities,  can- 
not be  thus  fixed. 

There  seems  to  be  a  mixture  of  truth  and  error  in  the 
doctrines  of  both  these  schools,  and  the  whole  truth  is  not 
affirmed  by  either :  the  first  school  is  misled  by  old  theories, 
which  are  mere  fallacies  resulting  from  what  is  called  the 
mercantile  theory :  their  opinions  are  erroneous,  not  be- 
cause they  are,  but  because  they  are  not  practical :  they  are 
founded  upon  old  abstractions,  abounding  in  errors,  and  not 
upon  facts,  although  they  imagine  them  to  be  so ;  and  surely 
there  can  be  no  true  monetary  science  that  is  not  founded 
on  facts.  The  cost  of  gold  and  silver,  as  well  as  other  com- 
modities, is  not,  as  I  have  elsewhere  shown,  represented  by 
the  amount  of  labor  required  formerly  to  produce,  or  now 


RELATIVE  VALUES  OF  DIFFERENT  METALS.  443 


to  reproduce  them.  Rise  and  fall  in  prices  is  a  rise  and  fall 
in  the  ratio  of  money  in  circulation  to  the  total  amount  of 
goods  bought  within  stated  periods :  the  units  in  the  de- 
nominator of  this  ratio  are  units  of  money,  and  the  units  in 
the  numerator  are  units  of  weights  and  measures  of  things 
sold  :  value  can  he  expressed  in  numbers  only.  A  tendency 
to  equality  of  compensation  results  from  the  competition  of 
producers  arising  from  necessities  absolute  and  relative: 
comparative  equilibrium  is  thus  maintained.  This  law  ap- 
plies to  the  production  of  the  precious  metals :  money  is  a 
necessity  for  civilized  men :  the  money  unit  is  a  creation  of 
the  human  intellect,  and  it  is  therefore  ideal ;  but  there  must 
be  some  tangible,  documentary,  or  recorded  evidence  of  the 
existence  of  the  unit  in  the  owner's  hands,  and  his  right  to 
use  it.  Gold  and  silver,  being  valuable  commodities,  have 
by  common  consent  been  used  to  manufacture  the  money 
unit  for  ages,  although  at  this  time  silver  seems  to  have  been 
either  directly  or  indirectly  demonetized  as  to  future  coinage, 
except  for  subsidiary  purposes,  by  most  of  the  large  commer- 
cial countries  of  Europe,  leaving  the  East  the  principal  cus- 
tomer. The  utility  of  silver  and  gold  in  the  arts  is  a  quality 
only,  not  a  tangible  thing  :  it  makes  gold  and  silver  rela- 
tively fitter  for  universal  adoption  as  material  to  manufact- 
ure the  unit :  that  is  all. 

Suppose  gold  to  be  the  only  material  in  use  for  the  pur- 
pose named,  and  silver  entirely,  as  it  has  been  partially, 
demonetized.  The  chief  value  of  gold  now  depends  upon 
the  mere  fact  that  some  material  or  some  mode  must  have 
been  adopted  to  furnish  money  units,  and  gold  has  by  com- 
mon consent  been  taken.  Its  value,  therefore,  is  founded  on 
a  necessity  supplied,  through  common  consent,  by  its  means. 
Its  value  is  only  extrinsic^  —  that  is  to  say,  it  is  equal  to  all  it 
will  exchange  for,  —  and  it  is  sufficient,  be  its  mass  greater 
or  less,  to  circulate,  or,  more  properly,  through  its  exchanges, 
principally  of  commodities,  and  incidentally  and  occasionally 
of  the  capital  which  is  an  agent  in  producing  them,  to  bring 
all  commodities  to  market  and  exchange  all  capital  when  and 
as  required.    All  that  is  required  is,  that  its  mass  be  suffi- 


444 


POLITICAL  ECONOMY. 


cient  in  size  to  make  units  enough  for  the  circulation  con- 
stantly going  on  throughout  the  commercial  world,  and  this 
requirement  it  answers.  Subject  to  the  inexorable  condition 
of  making  such  a  distribution,  it  is  immaterial  whether  the 
unit  weigh  a  pound  or  an  ounce,  or  whether  it  be  made  so 
small  that  no  subdivision  is  necessary.  Thus  the  value  of 
the  unit  is  entirely  conventional,  and  its  actual  relation  to 
the  units  of  merchandise  not  one  of  intrinsic  value,  after  the 
old  mercantile  theory,  but  of  number  of  possible  units,  after 
the  weight  of  the  unit  has  been  fixed.  It  is  entirely  a  ques- 
tion of  numbers,  because  there  is  no  natural  monetary  rela- 
tion between  any  given  weight  of  gold  and  any  human  want; 
the  value  of  the  commodity  gold  is  merged  in  the  value  of 
the  gold  units,  and  a  unit  is  worth  what  it  will  buy.  "  In- 
trinsic value "  now  appears  to  be  only  intrinsic  fitness  or 
adaptation  to  the  manufacture  of  money  units ;  but  this  mere 
quality  makes  the  coin  worth  no  more  than  the  same  weight 
of  lead,  iron,  or  copper,  had  either  of  these  been  of  no  greater 
mass  and  weight  than  gold,  and  adopted  as  the  material. 

In  the  next  place,  suppose  silver  adopted  in  addition  to 
gold,  and  governments  to  merely  assay  and  reduce  to  the 
form  of  milled  cylinders  both  silver  and  gold,  stamping  only 
the  weight  on  each.  Gold  having  been  adopted  first  (it 
is  really  immaterial  whether  we  suppose  gold  or  silver  be 
adopted  first)  by  weight,  silver  is  adopted  by  weight ;  and, 
without  regard  to  the  question  as  to  which  is  worth  the  most 
as  a  commodity,  abstract  from  money,  the  relative  value  of 
the  gold  unit  to  the  silver  unit  at  once  follows  the  relation 
of  the  weights  of  the  respective  masses  of  metal  coined. 
The  silver  having  been  adopted  in  addition  to,  and  not  to 
the  exclusion  of  gold,  and  positive  law  fixing  no  ratio  be- 
tween them,  the  value  fixes  itself  upon  the  average  by  the 
following  mathematical  inverse  proportion,  and  with  approx- 
imate mathematical  certainty,  i.  e.,  <£,  fr.,  of  gold  (same 
weight)  :  $,  fr.,  of  silver  (same  weight)  :  :  Mass  in  coin 
by  weight  of  silver  :  Mass  in  coin  by  weight  of  gold.  In  point 
of  fact,  this  proportion  would  be  constantly  changing  its  ele- 
ments, Jpecause  the  masses  would  be  constantly  changing,  and 


KELATIVE  VALUES  OF  DIFFERENT  METALS.  445 


the  changes  must  first  be  known  in  the  market  before  peo- 
ple can  generally  be  apprised  of  them  :  still,  upon  the  aver- 
age, the  proportion  would  be  maintained  with  almost  math- 
ematical accuracy.  But  surely,  upon  the  heels  of  this 
demonstration  no  "practical"  man  will  say  that  this  con- 
stant variation,  necessary  to  make  up  the  average,  ought  to 
be  tolerated,  if  it  can  be  avoided.  Can  it  be  avoided  ?  Un- 
questionably it  can.  If  England,  the  United  States,  Ger- 
many, and  the  "  Latin  Union  "  could  demonetize  silver,  they 
can  demonetize  gold  ;  and  if  they,  or  either  of  them,  can 
demonetize  either  or  both  gold  and  silver,  they  can  demon- 
etize either  in  part,  by  giving  a  little  more  or  a  little  less 
relative  value  to  the  one  or  the  other.  What  common  con- 
sent (that  is  to  say,  law)  has  done,  it  can  undo  in  whole 
or  part.  It  is  only  a  question  of  policy,  and  that  not  de- 
batable, because  the  advantage  of  a  fixed,  instead  of  a  con- 
stantly vibrating,  relation,  is  certainly  too  clear  to  require 
debate.  Were  gold  and  silver  the  material  of  coin  in  every 
country^  the  ratio  might,  under  free  coinage,  be  made  1  to  10. 
This  would  throw  more  gold  into  the  arts,  and  the  demand 
being  met,  the  surplus,  if  any,  would  go  into  coin.  Were 
copper  adopted  in  addition  to  silver,  the  same  law  of  propor- 
tion would  follow ;  but  the  copper,  if  deposited,  would  prob- 
ably perform  most  of  the  circulation,  because  the  fallacy  of 
the  old  mercantile  theory  of  intrinsic  value  might  retire  as 
much  as  possible  of  the  gold  and  silver  coin. 

But,  whether  retired  or  not,  we  should  have  the  propor- 
tion—  X,  fr.  of  gold  or  silver  :  <£,  |,  fr.  of  copper  (of 
equal  weight  with  gold  or  silver)  :  :  Mass  of  copper  in  coin  : 
Mass  of  gold  or  silver  in  coin.  To  make  the  proportion 
more  striking,  I  have  supposed,  on  the  adoption  of  silver,  a 
milled  cylinder  of  silver,  of  equal  weight  with  that  of  the 
gold  pound,  dollar,  or  franc,  to  take  the  same  name  with 
that  of  the  gold,  and  so  with  the  copper.  Copper  will  never 
be  monetized,  however,  not  because  the  mercantile  theory  of 
intrinsic  commodity  value  in  gold  and  silver  money  is  true, 
but  because  it  is  false.  Copper,  silver,  and  gold,  all  possess 
intrinsic  utility,  but  only  the  latter  two  for  the  manufacture 


446 


POLITICAL  ECONOMY. 


of  the  money  unit.  Hence  they  alone  are  used,  and  thus 
alone  acquire  conventional  value  in  that  character. 

Gold  and  silver  certainly  possess  "  intrinsic  value  "  over 
copper  to-day  in  a  much  higher  proportion  than  that  last 
given  ;  but  when  they  are  all  fully  monetized  their  "  intrinsic 
value  "  is  greatly  enhanced,  as  a  rectangular  piece  of  paper, 
duly  authenticated,  signed,  and  issued,  becomes  such  by  the 
issue.  If  the  copper  could  now  change  places  with  the  sil- 
ver, the  silver  with  the  gold,  and  the  gold  with  the  cop- 
per, in  weight,  their  relative  values  in  the  proportion  would 
change  in  like  manner.  Therefore,  the  unit  is  ideal,  and 
only  made  tangible  in  the  gold,  the  silver,  and  the  copper. 
There  is  no  standard,  because  the  unit  is  ideal.  Standard 
thus  resolves  itself  into  a  question  of  inirinsic  quality,  —  of 
relative  superior  fitness  in  one  or  more  metals,  over  others, 
to  manufacture  the  unit.  Standard  is  also  a  state  of  equi- 
librium, more  or  less  perfect,  between  all  branches  of  pro- 
duction, whereby  the  exchanges  are  duly  balanced,  and  pro- 
duction and  consumption  maintained  in  harmony.  From 
that  state  of  the  exchanges  of  commodities  result  steady 
prices  and  steady  rates  in  the  auxiliary  exchanges  of  money. 

Hence  the  school  of  "  intrinsic  value  "  is  in  error  in  affirm- 
ing intrinsic  value  ;  right  in  affirming  that  relative  values  of 
gold  and  silver  fix  themselves,  upon  the  average,  when  not 
fixed  by  law ;  and  wrong  in  affirming  that  they  cannot,  sub- 
ject to  the  demand  of  arts  and  manufactures,  be  fixed  by 
law.  The  other  school  is  right  in  maintaining  that  the  law 
can  fix  the  relation  of  value  between  the  metals  gold  and 
silver,  and  wrong  in  affirming  in  general  terms  that  it  can- 
not fix  the  purchasing  power  of  the  precious  metals  in  rela- 
tion to  other  commodities,  because  it  can  fix  the  relative  pur- 
chasing power  of  each.  Were  there  but  one  metal  in  the 
case  ;  were  all  metals  but  gold  demonetized,  legislation  could 
not  fix  the  purchasing  power  of  gold  as  a  whole ;  but  adopt 
silver,  or  silver  and  copper,  legislation  can  declare  what  gold, 
silver,  or  copper  shall  be  relatively  worth,  so  far  as  they  are 
used  as  money.  It  can  take  from  the  gold  and  add  to  the 
silver  or  the  copper  :  it  can  distribute  the  purchasing  power 


RELATIVE  VALUES  OF  DIFFERENT  METALS.  447 


as  it  pleases,  subject  only  to  demand  for  the  metal  in  arts 
and  manufactures.  The  latter  school  is  therefore  substan- 
tially right.  The  paper  or  letter  of  Mr.  Samuel  Smith,  presi- 
dent of  Liverpool  Chamber  of  Commerce,  published  in  the 
New  York  Banker's  Magazine,  is  a  masterly  step  towards 
founding  the  science  of  money  and  exchanges  upon  facts. 
The  silver  question  which  he  discusses  is  important,  but  the 
diffusion  of  sound  ideas  about  money  and  exchange  is  more 
important.  That  sound  ideas  do  not  prevail  is  evident  from 
the  conduct  of  Germany.  Great  Britain  and  the  United 
States  inflicted  upon  the  whole  commercial  world  great  in- 
jury by  demonetizing  silver  without  its  concurrence. 

But  there  is  one  question  naturally  arising  upon  the  asser- 
tion I  have  made,  that  copper  units,  if  coined,  in  pursuance 
of  law  generally  established,  would  follow  the  law  of  pro- 
portion indicated.  Why  will  they  follow  it  ?  I  answer :  for 
the  same  reason  that  silver  has  done  so.  But  why  should 
either  silver  or  copper  do  so  ?  Because  the  supposed  fact  of 
intrinsic  value  in  either  gold  or  silver  coin  as  money  does 
not  exist.  It  is  absolutely  necessary,  in  order  to  accomplish 
the  purposes  of  a  money  unit,  made  tangible  in  metal,  that 
a  unit  of  weight  should  be  adopted  :  if  the  three  metals, 
gold,  silver,  and  copper,  are  equally  and  universally  adopted 
as  money,  no  other  possible  relation  between  them  can  exist 
but  that  of  relative  weights  of  mass  coined.  If  they  were 
metals  not  used  to  make  units  of  money,  no  such  relation 
would  exist,  and  each  would  be  valued  upon  its  own  merits, 
and  agreeably  to  the  common  law  of  demand  and  supply ; 
but  inasmuch  as  they  are  all  material  for  money,  no  other 
relation  but  that  of  mass,  or  weight  of  mass,  is  possible  ;  and 
weight  having  been  adopted  in  one,  must  be  continued  in 
the  rest,  without  regard  to  intrinsic  value  as  money ^  for  that 
is  only  imaginary.  In  like  manner,  except  so  far  as  neces- 
sity, absolute  and  relative,  leading  through  demand,  both 
natural  and  artificial,  to  consumption,  changes  the  quantities 
of  commodities  all  the  time  according  to  the  demand  for  and 
supply  of  each,  the  same  rule  applies  to  the  units  of  weights 
and  measures  of  all  commodities.    The  quantity  in  the 


448 


POLITICAL  ECONOMY. 


market  for  sale,  and  actually  put  on  the  market  and  sold, 
determines  the  number  of  units  in  the  numerator  of  the  ra- 
tio which  gives  price,  and  the  price  of  each  is  naturally  ap- 
portioned, through  the  units  of  money  in  the  denominator, 
to  the  price  of  all  others,  in  harmony  with  the  necessities 
and  wants  of  mankind,  as  the  relative  value  of  each  to  the 
others  would  be  apportioned  if  exchanges  were  made  through 
barter.  Thus,  where  wheat  and  rye  could  be  raised  at  the 
same  cost,  wheat  would  still  fetch  the  highest  price,  because 
most  in  demand. 

The  opinion  of  the  founders  of  the  Bank  of  England  was, 
that  its  notes  would  vary  like  gold,  and  that  the  gold  would 
vary  like  the  commodities  before  mentioned,  meaning,  I 
presume,  that  they  would  furnish  prices  as  steady  as  gold 
itself  could  make  them ;  varying,  that  is  to  say,  rising  and 
falling,  only  as  those  of  the  metallic  commodity,  and  not  the 
units  of  gold,  would.  It  is  certain  however,  that  they  were 
mistaken,  and  yet  there  must  be  some  truth  on  which  their 
opinions  and  theories  have  been  founded,  for  the  circulation 
of  France  is  comparatively  steady ;  prices  there  are  steady, 
and  she  is  visited  by  no  commercial  crises ;  she  only  suffers 
by  their  reaction  upon  her  commerce.  There  must  be  a  fal- 
lacy somewhere.  Where  is  it  ?  It  lies  in  supposing  gold 
and  silver  coin  to  be  ordinary  commodities  like  wheat.  But 
if  wheat  were  adopted  as  money,  they  may  be  supposed  to 
ask,  would  it  not  still  be  a  commodity  ?  Doubtless  it  would, 
when  consumed ;  but  as  money  it  could  possess  no  "  intrinsic 
value  "  or  intrinsic  utility,  except  as  a  series  of  unit  centals, 
or  unit  bushels,  to  measure  as  units  the  values  of  all  other 
things  :  there  can  be  no  valuation  in  anything  but  units. 
While  and  so  long  as  wheat  is  not  money  its  value  is  meas- 
ured, like  other  commodities,  in  units  of  a  kind  not  fur- 
nished by  itself  :  its  value  is  shown  by  proportional  num- 
bers. When,  however,  it  is  adopted  as  mone}^  it  is  adopted 
as  the  material  to  furnish  units  of  money  ;  a  thing  that  val- 
ues other  things  cannot  value  itself  ;  it  can  only  in  turn  be 
valued  by  them  ;  it  is  all  a  question  of  relation.  Therefore, 
if  wheat  were  adopted  as  money,  its  present  relative  value 


EELATIVE  VALUES  OF  DIEFERENT  METALS.  449 

to  rye  and  other  grain  would  be  measurably  lost.  Before 
it  was  money,  wheat  and  rye  were  respectively  valued  in 
money,  according  to  the  demand  for  and  supply  of  each:  this 
relation  is  taken  away  by  adopting  units  of  wheat  alone  as 
money.  But  suppose  units  of  rye  to  be  adopted  as  money, 
in  addition  to  the  units  of  wheat.  Before  either  of  them 
was  adopted,  a  cental  of  wheat  was  worth  a  cental  and 
a  quarter  of  rye,  but  now  the  centals  are  perhaps  mutual 
equivalents,  and  one  will  exchange  for  the  other.  But  are  • 
the}^  not  both  commodities  still?.  Will  they  not,  therefore, 
still  exchange  in  the  former  proportion  ?  Before  they  were 
money,  wheat  was  always  worth  more  than  rye.  Why 
should  it  not  be  so  still  ?  Because,  both  being  money,  and 
units  of  weight  or  measure  being  indispensable,  in  order  to 
use  both  wheat  and  rye  as  money,  their  respective  purchas- 
ing powers  must  be  apportioned,  and  in  point  of  fact  ^  regard- 
less of  abstract  theory,  will  be  apportioned  in  some  practica- 
ble way ;  and  there  is  no  practicable  way  but  that  of  barter 
exchange  by  weight  or  measure.  The  intrinsic  qualities  of 
the  cental  or  bushel  units  no  longer  determine  the  relative 
values  :  all  that  is  wanted  of  the  material  employed  for 
money  is  to  furnish  units.  But  before  the  adoption  of 
wheat  and  rye  the  quantity  of  wheat  produced  was  largely 
in  excess  of  that  of  rye ;  and  yet  wheat  stood  to  rye  in  value 
as  125  to  100 :  now,  after  both  are  money,  the  wheat  unit 
stands  to  rye  as  100  to  100.  But  is  there  not  a  fallacy  in 
the  latter  proposition  ?  Why  should  they  stand  in  that  pro- 
portion necessarily  ?  Suppose  the  production  of  wheat  and 
rye  equal :  even  then  the  proposition  is  not  true,  for  although 
each  furnishes  the  same  number  of  units,  more  than  half  the 
wheat  will  be  used  for  bread,  and  more  than  half  the  rye  for 
money.  But  suppose  rye  to  be  in  excess  of  wheat  twenty- 
five  per  cent. :  in  that  case  all  the  wheat  might  be  used  for 
bread,  and  all  the  rye  for  money  :  then  the  value  of  wheat 
and  rye  actually  used  as  money  will  be  to  each  other  in- 
versely as  the  weights  of  their  respective  masses.  This  is 
"  practically  "  the  true  proportion,  because  no  other  propor- 
tion is  possible.    But  it  is  in  the  nature  of  things  that  this 

29 


450 


POLITICAL  ECONOMY. 


proportion,  being  one  of  mass  to  mass  only,  should  be  chang- 
ing from  time  to  time,  as  the  relative  quantities  of  wheat 
and  rye  used  as  money  are  shown  to  change  ;  and  therefore 
the  true  course  is  to  approximate  the  average  relative  values, 
and  iBx  the  ratio  by  law,  that  is  to  say,  by  common  consent. 
This  law  applies  as  well  to  silver  and  gold,  copper,  and 
all  other  metals,  and  all  measurable  or  ponderable  things 
adopted  as  material  to  make  units  of  money.  Hence  com- 
mon usage  nationally  can  adopt  any  kind  of  material ;  and 
if  the  material  chosen  have  no  appreciable  value,  as  in  case 
of  bank-notes,  and  bank  books  where  credits  are  registered, 
with  their  various  transfers  and  debits  and  credits,  a  form 
of  authentication  is  adopted  with  a  guaranty  of  purchasing 
power,  and  the  only  limitation  of  the  issue  of  units  in  the 
absence  of  "  specie  payments "  is  payment  back  to  the 
issuer  as  commodities  produced  are  consumed.  Payments 
can  only  be  made  through  actual  exchanges  of  things  pro- 
duced, and  the  exchanges  can  go  on  only  as  actual  con- 
sumption takes  place.  But  with  paper  currency  this  is  con- 
tingent and  uncertain.  To  make  sure  that  it  shall  take  place, 
the  notes  and  credits  are  made  convertible  on  demand  into 
gold  and  silver :  but  if  we  suppose,  approximately,  the  an- 
nual purchases  of  gold  by  the  United  States,  England,  and 
France  to  be  to  each  other  respectively  as  1,  2,  and  3,  it  is 
quite  certain  that  if  the  United  States  and  England  receive 
any  substantial  benefit  from  convertibility  it  must  be  by 
making  the  paper  and  credit  units  in  the  denominator  of 
price  vary  precisely,  or  at  least  very  nearly,  in  harmony 
with  the  gold  units.  This  would  require  a  fixed  proportion 
of  reserve  to  liabilities.  Such  a  rule  the  United  States  and 
England  have  never  followed,  because  they  have  never 
known  what  it  means :  writers,  bankers,  and  financiers  all 
consider  gold  coin  a  commodity  in  the  ordinary  sense,  and 
practically  make  it  such  in  their  reserves.  But  as  price  de- 
pends upon  all  the  units  of  money  in  the  denominator  of  the 
ratio  of  price,  and  not  at  all  upon  units  out  of  it,  the  gold 
reserves  in  the  United  States  and  England  have  no  direct 
effect  in  keeping  prices  steady,  because  they  do  not  control 


EELATIVE  VALUES  OF  DIFFERENT  METALS.  451 


and  limit  discounts  :  they  only  limit  the  range  of  prices  ;  the 
more  capital  invested  in  gold,  so  much  the  narrower  will  be 
the  limits  of  the  range.  This  is  all  the  effect  they  have,  and 
that  entirely  an  indirect  one,  upon  discounts,  except  the 
forcing  sales  and  thus  reducing  the  volume  of  discounts  to 
some  extent  by  raising  the  rate  of  discount,  on  the  part  of 
the  Bank  of  England,  when  gold  is  borrowed  and  exported 
to  buy  raw  material,  merchandise,  and  securities  at  cheaper 
rates  than  they  can  be  purchased  in  England. 

Some  little  regulation  of  discounts  is  thus  obtained ;  but 
Mr.  Bonamy  Price  is  well  entitled  to  ask:  "  Of  what  use  is 
all  this  gold  in  reserve  ?  The  question  is  well  put  if  gold 
coin  is  an  ordinary  commodity  and  also  a  standard.  It  is 
neither.  It  is  an  accident  that  gold  is  worth  from  four  to 
five  per  cent,  more  than  government  and  bank-notes  in  the 
United  States.  It  is  the  accident  of  demonetization  that 
makes  silver  bullion  worth  less  than  convertible  treasury 
notes.  Given  the  whole  mass  of  gold  in  coin  by  weight 
while  it  is  the  only  material  of  money,  its  purchasing  power 
as  a  "  precious  metal,"  in  relation  to  other  commodities,  can- 
not be  fixed  by  legislation.  Why?  Simply  because  there 
is  nothing  remaining  to  be  fixed. 

To  assume  the  power  to  fix  the  exchangeable  value  of  the 
metal  is  to  assume  that  legislation  can  to-day  effectually 
declare  two  and  two  to  be  four,  and  to-morrow  five.  Given 
the  mass,  it  follows  that  units  must  be  made ;  and  they  can- 
not be  made  without  fixing  the  weight  or  measure.  If  the 
weight  of  the  unit  is  relatively  large  or  small,  its  purchas- 
ing power  is  made  relatively  large  or  small  in  exact  mathe- 
matical proportion.  Now  suppose  gold  to  be  that  mass :  its 
purchasing  power  cannot  be  fixed  by  legislation.  But  sup- 
pose silver  to  be  also  monetized,  without  fixing  between  gold 
and  silver  any  ratio  by  law,  the  government  only  stamping 
and  milling  all  coin,  declaring  the  weight  by  stamping  it  on 
each :  in  the  long  run  the  respective  values  of  each  reckoned 
in  the  other  will,  with  approximate  certainty,  be  as  the  re- 
spective quantities  of  each  ;  but  there  will  be  a  constant  oscil- 
lation or  variation  above  and  below  the  true  ratio,  as  there  is 


452 


POLITICAL  ECONOMY. 


in  the  proportion  of  quantities  of  relative  to  absolute  neces- 
saries, and  of  quantities  of  money  in  circulation  and  prices, 
.between  the  beginning  of  one  commercial  crisis  and  the 
coming  of  another.  Therefore,  the  ratio  of  relative  value 
between  the  two  metals  ought  to  be  fixed  by  international 
agreement  and  law,  that  is  to  say,  by  treaty*. 

The  remonetization  of  silver  would  be  a  grievance  in  re- 
spect to  its  weight  and  bulk;  but  this  might  be  remedied 
by  governments  taking  the  stocks  of  silver  bullion  in  charge 
and  issuing  tokens  or  certificates,  without  coining  beyond 
the  amount  necessary  for  change.  A  general  remonetiza* 
tion  of  silver  would  probably  be  beneficial  in  point  of  equi- 
librium in  the  long  run,  but  in  the  present  state  of  monetary 
knowledge  a  partial  one  might  be  immediately  productive  of 
harm.  With  a  constantly  varying  gold  and  silver  reserve, 
averaging  in  volume  as  heretofore,  according  to  the  caprice 
of  the  bankers  of  England  and  the  United  States,  so  large 
an  increase  of  metallic  units  in  the  shape  of  silver,  con- 
stantly varying,  as  they  now  do,  would  only  enhance  the 
mischief. 

Finally,  governments  will  not  be  likely  to  consent  to  re- 
monetization of  silver  at  present ;  but  in  the  mean  time  the 
disturbance  caused  by  demonetization  in  Germany  and  the 
Latin  Union  continues,  and  ought  to  be  retired,  as  I  have 
already  said,  very  slowly,  or  by  the  issue  of  paper,  allow- 
ing the  future  production  of  silver  to  take  care  of  itself. 
Meantime  the  law  of  metallic  equilibrium  is  shown  to  be 
as  follows  :  Common  consent  (in  other  words,  legislation) 
cannot  fix  the  purchasing  powder  of  any  single  metal  exclu- 
sively adopted  as  money.  To  affirm  that  it  can,  is  equiv- 
alent to  affirming  that  the  whole  is  greater  and  also  that  it 
is  less  than  the  sum  of  all  its  parts.  But  when  two  or  more 
metals  are  adopted  as  the  material  of  money,  the  relative 
barter  values  of  each  as  expressed  in  the  other  will  be  in- 
versely as  their  respective  masses  going  into  coin  by  weight. 
The  respective  masses  are  subject  to  variation,  and  the  ratio 
ought,  therefore,  to  be  fixed  once  for  all,  with  the  highest 
possible  approach  to  accuracy.    Such  fixation  is  possible. 


EELATIVE  VALUES  OF  DIFFERENT  METALS.  453 


because  if  common  consent  —  that  is  to  say,  if  legislation 
—  can  monetize  any  one  metal,  it  can  monetize  two ;  and 
if  it  can  monetize  two,  it  can  and  ought,  unquestionably, 
to  declare  the  ratios.  This  can  only  be  done  by  the  com- 
mercial world. 


CHAPTER  XXVI. 


CONTRACTION  AND  EXPANSION. 

Expansion  of  circulation,  or  increase  in  the  distribution 
of  money,  takes  place  in  every  commercial  country  in  propor- 
tion to  the  increase  of  productive  capital,  when  such  expan- 
sion is  possible,  and  it  always  is  possible  under  a  circulation 
of  gold  or  silver,  bank-notes,  or  notes  issued  by  government. 
Under  a  system  of  deposits  and  loans  an  economy  of  money 
is  effected  in  payments  to  depositors  to  the  extent  of  the 
loans,  besides  maintaining  a  volume  of  production  equal  to 
the  latter,  the  actual  amount  of  gold  and  silver  and  bank- 
notes in  use  being  that  found  in  circulation  and  in  deposit 
and  redemption  reserves.  Under  a  currency  of  gold  and  sil- 
ver without  any  banks,  the  only  expansion  possible  would  be 
through  the  share  in  the  annual  production  of  the  mines 
belonging  to  the  country  having  it ;  and  if  that  were  pro- 
portioned to  the  increase  of  capital  there  would  be  no  in- 
crease of  prices. 

If  the  annual  production  were  evenly  distributed,  and  all 
nations  had  a  metallic  or  strictly  representative  circulation, 
without  deposit  loans,  there  could  probably  have  been  no 
expansion  or  increase  of  prices  through  increase  of  gold  sup- 
ply, as  supposed  by  some,  because  capital  has  probably  in- 
creased as  fast  as  gold  and  silver.  The  opinion  that  it  has 
not,  has  arisen  from  not  regarding  all  the  facts  in  the  case. 
If  two  thirds  of  the  annual  product  goes  to  countries  having 
only  one  third  of  the  commercial  world's  capital,  it  is  mani- 
fest that  the  annual  increase  of  money  in  the  other  countries, 
having  two  thirds  of  the  capital  and  only  one  third  of  the 
bullion,  must  consist  of  half  paper  and  half  coin ;  and  thus, 
and  thus  only,  can  the  annual  increase  of  gold  and  silver  be 


CONTRACTION  AND  EXPANSION. 


455 


in  excess.  Aside  from  this  increase  of  paper,  to  supplement 
the  want  of  coin,  in  consequence  of  the  unequal  distribution 
of  the  annual  product  of  the  mines,  a  tariff  on  imports  or 
a  tax  on  production  will,  with  a  variable  reserve,  require 
an  issue  of  bank-notes  or  increase  of  deposits,  or  both,  to 
make  up  for  the  increased  cost  of  the  goods ;  while,  with  a 
currency  like  that  of  France,  or  with  an  unvarying  reserve, 
the  prices  of  other  things  would  fall  in  proportion.  This 
rise  of  price,  however,  is  not  uniform,  and  has  no  effect  in 
expanding  prices  elsewhere  in  the  commercial  world ;  and 
therefore,  under  a  paper,  and  still  more  under  a  deposit  loan 
system,  much  of  the  benefit  of  protection,"  is  unfortunately 
lost. 

Finally,  by  deposit  loans  an  expansion  more  than  equiva- 
lent to  an  equal  volume  of  bank-notes  is  produced,  because, 
beside  being  equivalent  in  effect  to  the  same  amount  in  bank- 
notes to  the  holders  of  deposits,  an  equal  volume  of  loans  is 
maintained  in  the  markets  of  production,  distribution,  labor, 
and  circulating  capital,  producing  increase  of  prices,  which, 
if  it  cannot  always  be  met  by  an  equal  increase  in  all  money 
reserves,  is  met  by  the  use  of  credit,  which  thus  becomes 
supplementary  to,  and  not  a  substitute  for  cash,  as  sometimes 
asserted,  because  cash  is  only  paid  at  the  expiration  of  the 
credit. 

Expansion  of  circulation,  or  an  increased  distribution  of 
money,  takes  place  in  proportion  to  the  increase,  and  con- 
traction takes  place  in  proportion  to  the  decrease  of  produc- 
tion, whether  the  money  be  gold  and  silver,  bank-notes,  or 
money  in  deposit  and  bank-notes.  In  the  ratio  of  price  the 
number  of  units  and  not  their  material  is  essential. 

If  loans  are  made  out  of  bank  reserve  to  the  amount  of 
five  millions,  to  pay  for  labor  and  materials  in  the  construc- 
tion of  a  railroad,  which  proves  a  profitable  investment,  a 
part  of  the  money  expended  in  this  manner  will  be  re- 
quired to  exchange  the  new  circulating  capital,  and  also 
to  transact  the  new  business  demanded  of  it.  If  totally  un- 
profitable, the  money  will  be  redundant,  and  must  be  retired 
by  redemption  of  the  bank-notes,  or  the  payment  of  the 


456 


POLITICAL  ECONOMY. 


bank  loans  through  which  the  currency  to  pay  for  the  labor 
was  distributed.  If  the  projectors  have  the  money,  they 
must  pay  up  and  thereby  reduce  the  volume  of  circulating 
money  to  its  former  amount :  if  they  are  solvent  and  do  so, 
they  thereby  enable  the  banks  from  whence  they  loaned  to 
meet  their  liabilities  in  the  way  of  deposits,  or  by  way  of  new 
issues.  If  they  are  not  solvent,  these  liabilities  of  the  banks 
will  be  reduced  by  redemption  of  notes  to  some  extent,  but 
chiefly  through  payment  of  loans.  In  this  manner,  by  the 
aid  of  their  own  capital,  bankruptcy  may  be  averted  by  the 
banks.  This  forced  contraction  of  loans  is  a  contraction  of 
the  currency,  because  it  is  money  that  the  borrowers  owe  the 
banks,  and  it  is  money  that  the  banks  owe  to  each  other,  and 
to  their  depositors :  if  it  were  credit  and  not  money  that  is 
wanted  at  such  times  to  make  payments,  the  process  of  new 
to  balance  old  credit  need  only  be  repeated ;  but  money  is 
required,  and  the  quantity  of  money  is  limited.  The  forced 
contraction  of  loans  and  inability  to  obtain  more,  upon  some 
sudden  failure,  culminates  in  panic  and  crisis,  and  ends,  per- 
haps, in  closing  the  doors  of  some  or  all  the  banks ;  but 
whether  or  not  this  is  the  case,  the  result  is  contraction  pre- 
paratory to  another  expansion.  If  gold  and  silver  are  in  use 
without  bank-notes,  but  with  banks,  the  process  is  the  same, 
except  as  to  redemption  of  bank-notes. 

HOW  EXPANSION  AND  CONTRACTION  OCCUR  UNDER  A  CUR- 
RENCY OF  SILVER  AND  GOLD,  AND  HOW  UNDER  THAT  OF 
BANK-NOTES. 

If  gold  and  silver  coin,  without  banks,  be  the  currency, 
the  expansion  occurs  by  means  of  money  taken  out  of  capi- 
talists' reserves,  and  the  annual  and  continuing  gains  in  bull- 
ion ;  but  this  is  merely  an  abstract  statement,  as  gold  and 
silver,  without  banks,  are  not  the  only  currency  in  the  world, 
and  if  they  were,  their  increase  could  not  be  in  excess  of  cap- 
ital. If  investments  are  productive,  the  money  is  needed 
for  the  same  purposes  as  bank-notes  and  money  in  deposit, 
where  these  are  in  use.  If  the  investment  is  productive,  the 
extra  money  will  continue  in  active  use :  if  unproductive. 


CONTRACTION  AND  EXPANSION. 


457 


the  money  will  be  gradually  retired,  or  find  its  way  abroad, 
and  thus  contract  in  proportion  to  the  contraction  in  produc- 
tion. If  bank-notes,  without  banks  of  discount  and  deposit, 
but  convertible,  are  in  use,  the  bank-notes,  as  soon  as  they 
are  paid  out  for  labor  and  materials,  if  the  investment  is  pro- 
ductive, will  continue  thenceforth,  through  issues  and  re- 
demptions, up  to  a  certain  volume,  in  active  use  :  if  unpro- 
ductive, they  will  depreciate  if  kept,  and  are  therefore  re- 
turned for  gold,  which  will  ultimately  find  its  way  abroad,  as 
in  the  former  case.  There  can  be  no  crisis,  because  there 
are  no  bank  loans.  Where,  in  the  absence  of  banks  of  de- 
posit and  loans,  there  are  note-issuing  banks,  authorized,  as 
all  men  were  at  common  law,  to  discount  notes  and  bills  for 
customers,  by  an  issue  of  notes,  to  be  redeemed  on  demand, 
there  would  be  loans,  although  no  deposits.  In  this  case  the 
notes  could  not  be  retired  into  deposit,  thus  holding  the  de- 
posit bank  liable  in  the  first  instance^  instead  of  the  issuer 
of  the  notes ;  and  therefore,  as  soon  as  the  notes  were  not 
needed  they  would  begin  to  depreciate,  and  would  be  re- 
turned for  coin. 

Expansion  of  deposits  may  occur  by  large  issues  of  bank- 
notes issued  for  the  firsf  time  instead  of  being  paid  out  of 
reserve,  and  which,  after  they  are  no  longer  needed,  are  de- 
posited, instead  of  being  sent  home  for  redemption.  They 
are  thus  redeemed  through  deposits  by  diminishing  the  ratio 
of  reserve,  and  are,  at  a  subsequent  stage,  redeemed  out  of 
reserve.  This  occurred  on  a  grand  scale  in  1857,  and  was 
supposed  to  be  one  of  the  immediate  causes  of  the  bank 
panic  of  that  year,  so  far  as  the  banks  of  New  York  city 
were  concerned.  Deposits  had  checked  the  depreciation  of 
notes,  and  prevented  their  being  sent  home  for  redemption. 
The  totals  of  deposits,  increasing  annually  more  and  more  up 
to  1857,  demonstrate  this  proposition  in  the  clearest  manner. 
The  line  of  equality  was  crossed  in  1854.  In  1855  deposits 
were  four  millions  ahead  ;  and  if  discounts  had  then  stopped 
until  and  as  the  reserve  had  increased,  and  if  the  reserve  had 
never  been  allowed  to  fall  below  the  figures  of  that  month, 
these  bank-notes  could  not  have  found  a  retiring  place  in 


458 


POLITICAL  ECONOMY. 


deposits,  and  therefore  would  have  been  sent  home  for  re- 
demption, as  soon  as  they  were  redundant,  for  the  purpose  of 
replenishing  reserves,  and  their  further  issue  would  have 
been  stopped.  The  notes,  instead  of  being  retired  by  re- 
demptions in  coin,  as  bank-notes  were  in  Adam  Smith's  time 
in  Scotland,  were  converted  by  deposit  into  another  form  of 
bank  debt  still  more  efficient  than  themselves  in  expanding 
production. 

HOW  EXPANSION  AND  CONTRACTION  TAKE  PLACE  WITH 
BANKS  OF  DEPOSIT  AND  DISCOUNT,  AND  AN  INCON- 
VERTIBLE CURRENCY. 

Under  an  inconvertible  currency  issued  by  government  or 
banks,  where  the  limit  of  the  issue  is  reached,  there  can  be 
no  contraction  of  the  currency ;  but,  nevertheless,  contrac- 
tion takes  place  by  a  contraction  in  the  other  element  of  the 
ratio,  —  in  capital,  —  for,  as  already  stated,  there  is  a  pro- 
portion established  between  all  capital  and  all  money,  of 
whatever  kind  it  be,  after  the  money  is  once  distributed.  If 
the  quantity  of  money  is  fixed,  and  the  quantity  of  capital 
progressively  increases,  the  prices  of  the  latter,  in  its  various 
forms  of  real  estate,  whether  appearing  directly  or  in  the  rep- 
resentative character  of  debentures,  mortgages,  and  stocks, 
as  well  as  the  prices  of  commodities,  must  contract  as  soon 
as  the  limit  of  expansion  is  reached  ;  and  when  borrowers 
have  laid  out  the  money  loaned  unproductively,  they  are 
unable  to  pay,  and  contraction  by  way  of  payment  of  other 
loans  takes  place,  as  it  always  takes  place  with  convertible 
notes  where  bank  loans  have  been  made  in  the  usual  ex- 
cess and  upon  a  national  scale.  There  is  a  striking  differ- 
ence, however,  in  the  result,  where  inconvertible  notes  like 
legal  tenders  are  in  use.  The  quantity  continues  the  same, 
and  the  only  important  contraction  is  in  loans.  After  a 
crisis  there  is  unquestionably  a  relative  contraction  between 
money  in  deposit  and  money  out  of  deposit.  Money  in  de- 
posit increases,  and  money  out  of  deposit  decreases.  In  1858 
there  was  a  great  contraction  by  the  retirement  of  bank- 
notes. 


CONTRACTION  AND  EXPANSION. 


459 


Before  the  crisis  of  1873  there  was  a  relative  contraction, 
as  already  stated,  because  the  limit  of  notes  and  of  bank  ex- 
pansion had  been  reached.  During  the  crisis  a  demand  for 
currency,  in  consequence  of  panic,  on  the  part  of  depositors, 
including  country  and  interior  banks,  arose,  and  thus  an 
increase  of  money  out  of  deposit.  This  increase  has  since 
returned  to  deposit,  carrying  with  it  an  additional  amount 
equal  to  its  own  volume  from  the  same  source,  the  latter 
representing  shrinkage  or  contraction  in  the  "  volume  "  of 
business.  It  has  gone  into  deposit  reserve  precisely  as  it 
would  go  into  private  reserves  if  there  were  no  banks.  The 
total  volume  of  deposits  and  money  out  of  deposit  remains 
about  the  same,  except  through  contraction  in  loans,  whereas 
in  1858,  while  there  was  a  very  large  contraction  in  loans, 
there  was  a  corresponding  contraction  in  all  money  reserves, 
whether  in  deposit  or  out,  by  the  retiring  of  bank-notes. 

The  elements  of  another  crisis,  therefore,  so  far  as  loans 
are  concerned,  are  ready  now  as  soon  as  the  ability  arises  to 
use  them.  There  is  no  natural  contraction  possible  in  legal 
tender  notes,  and  therefore  none  in  the  bank-notes  redeem- 
able in  them. 

THE  LAW  OF  EXPANSION  AND  CONTRACTION. 

The  law  of  expansion  and  contraction  may  be  stated  as 
follows  :  If  the  currency  of  the  commercial  world  consisted 
entirely  of  gold  and  silver,  or  a  strictly  representative  paper 
currency  representing  precisely  the  same  amount  of  gold  and 
silver  in  deposit,  without  deposit  loans,  there  could  not  be 
such  a  thing  as  expansion  or  contraction  to  any  noticeable 
extent.  The  loss  of  capital,  and  therefore  of  production,  in 
one  country,  causing  an  export  of  gold  to  remain  perma- 
nently abroad,  would  produce  so  far  a  general  expansion  of 
prices  throughout  the  commercial  world ;  but  this  would  be 
effected  so  gradually  as  to  be  of  little  practical  importance. 
If  the  currency  consisted  of  gold  and  silver  with  bank-notes, 
but  without  deposit  loans,  then  the  result  would  be  the  same. 

Some  of  the  bullionists,  who  advocate  an  exclusively  me- 
tallic currency,  have  confined  the  effect  of  the  notes  to  the 


460 


POLITICAL  ECONOMY. 


countries  using  them,  and  have  followed  it  no  farther.  But 
herein  they  have  erred,  and  therefore  their  investigations 
have  so  far  been  ineffectual,  through  not  exploring  and  cov- 
ering the  whole  ground. 

A  few  observations  will  make  this  plain.  If  the  currency 
of  the  commercial  world  consisted  entirely  of  gold  and  silver, 
without  deposit  loans,  general  prices  would  ultimately  be  re- 
duced by  more  than  half.  If  the  United  States,  on  a  return 
to  specie  payments,  has  three  hundred  millions  of  dollars  in 
coin,  the  total  of  coin  in  France,  England,  and  the  United 
States  will  be  about  twenty-one  hundred  millions,  and  the 
total  paper  seven  hundred  and  fifty  millions.  If,  under  a  cir- 
culation composed  entirely  of  gold  and  silver  in  these  three 
countries,  and  without  any  banks,  the  average  price  of  a 
bushel  of  wheat,  which  we  will  call  one  dollar,  would  be 
reduced  to  fifty  cents,  the  paper  circulation  added  would 
carry  the  price  up  a  little  more  than  thirty- three  and  one  third 
per  cent.,  or  say  to  sixty-five  cents  a  bushel.  The  rise  of 
general  prices,  then,  throughout  Europe  and  in  the  United 
States,  has  occurred,  partly,  from  the  adoption  of  a  paper 
currency.  Prices  in  France,  although  lower  than  in  Eng- 
land and  the  United  States,  nevertheless  must  have  risen 
from  the  same  general  causes  which  have  produced  the  rise 
elsewhere.  Gold  and  silver  alone,  then,  do  not  make  any 
lower  prices  than  paper,  after  paper  is  once  issued  and  duly 
distributed  ;  but  if  all  other  countries  had  a  monetary  system 
like  France  prices  would  be  greatly  reduced.  Hence  the  is- 
sue of  paper  in  the  United  States  and  England  has  affected 
prices  in  France  also.  The  proper  field  for  the  examination 
of  money,  then,  is  the  whole  commercial  world,  and  not  one 
country  merely. 

In  the  next  place,  there  is  an  additional  expansion  created 
by  deposit  loans,  which  is  essentially  different  from  an  in- 
crease, permanent  or  temporary,  of  the  total  number  of  units 
of  money :  it  is  an  increase,  not  of  the  units,  but  of  their 
circulation.  An  expansion  by  bank  loans  is  properly  a  re- 
dundancy, differing  from  other  kinds  of  redundancy  in  the 
fact  that  it  is  perpetually  recurring,  while  they  are  occa- 


CONTRACTION  AND  EXPANSION. 


461 


sional  and  temporary.  Redundancy  is  a  disturbance  of  the 
natural  order  of  the  distribution  of  money,  whereby  too 
much  of  it  is  taken  from  one  place  to  distribute  in  another, 
as  happened  frequently  at  Rome  both  before  and  during 
the  Roman  Empire,  and  as  happened  of  late  in  Germany. 
The  redundancy  arising  from  bank  loans  is  in  a  constant 
state  of  action  and  reaction,  above  and  below  an  average, 
producing  higher  prices  than  could  possibly  exist  with  a 
currency  outside,  in  the  absence  of  banks,  and  amounting  to 
the  total  of  circulation  "  and  deposits.  Redundancy  aris- 
ing from  bank  loans  is  a  constant  and  undue  accumulation 
of  the  power  to  employ  money  in  the  markets,  for  the  most 
part,  of  manufacturing,  and  not  agricultural  production, — 
although  there  may  be  some  exceptions,  as  to  the  latter,  — 
of  distribution,  and  of  circulating  capital,  in  the  shape  of 
stocks,  bonds,  government  and  municipal  debt,  etc.  It  is  re- 
dundancy, because  it  is  in  its  effect  on  production  and  prices 
equivalent  to  an  artificial  accumulation  of  money  in  a  partic- 
ular market,  and  would  not  be  found  there  if  there  had 
not  been,  though  an  excess  of  loans,  an  excess  of  the  power 
to  circulate  money  in  aid  of  production  beyond  what  would 
have  been  possible  if  the  money  had  been  kept  by  the  owners 
in  their  own  private  reserves,  instead  of  being  consolidated 
in  banking  reserve.  This  redundancy  begins  by  loaning 
money  out  of  the  reserve,  and  is  maintained  by  its  redeposit, 
the  latter  giving  a  power  to  use  money  to  an  equal  amount 
out  of  the  common  reserve :  the  power  increases  for  a  time 
as  production  gains  upon  consumption.  If  the  circulation  is 
exclusively  metallic,  with  banks,  then  labor  is  paid  with 
coin  out  of  reserve ;  and  the  expansion  produced  by  coin  is 
of  the  same  kind  as  that  produced  by  bank-notes,  as  demon- 
strated in  a  variety  of  forms  in  other  chapters.  This  ex- 
pansion, both  in  England  and  in  the  United  States,  has  for 
a  long  time  taken  place  periodically  by  the  use  of  credit, 
in  bank,  not,  as  erroneously  claimed  by  Mill  and  Price,  by 
way  of  substitute  for  money,  but  as  a  power  to  put  money' 
in  circulation. 

To  return  again  to  the  currencies  of  France,  England,  and 


462 


POLITICAL  ECONOMY. 


the  United  States,  it  is  unnecessary,  for  the  purposes  of  this 
inquiry,  to  include  in  the  investigation  the  rest  of  the  com- 
mercial world  :  it  would  be  difficult  to  verify  the  data  ;  and 
the  result,  if  we  confine  ourselves  to  these,  will  be  suffi- 
ciently comprehensive  for  our  purpose.  If  a  currency  of 
gold  and  silver,  alone,  or  with  strictly  representative  notes, 
were  resorted  to,  the  total  would  be  reduced  from  the  pres- 
ent twenty-one  hundred  millions  (allowing  three  hundred 
millions  for  the  United  States  after  a  return  to  specie  pay- 
ments) of  gold  and  silver,  seven  hundred  and  fifty  millions 
of  paper,  and  twenty-three  hundred  millions  of  deposits, — 
in  all  five  thousand  one  hundred  and  fifty  million  dollars,  — 
to  twenty-one  hundred  millions  ;  and,  as  before  stated,  prices 
would  be  ultimately  reduced  more  than  fifty  per  cent.  The 
preceding  figures  are  merely  assumed  to  give  some  idea  of 
the  enormous  contraction  which  would  result.  We  have 
already  seen  that  the  total  of  paper  —  seven  hundred  and 
fifty  millions  —  would  only  raise  prices  thirty  per  cent.,  or 
from  fifty  to  sixty-five  cents.  Where,  then,  shall  we  find 
the  money  required,  to  bring  them  up  to  the  actual  figures  of 
one  dollar?  We  find  it  in  deposits,  and  there  only.  De- 
posits, in  the  three  countries,  amounting  to  about  twenty- 
three  hundred  millions,  will  give  us  nearly  the  remaining 
thirty-five  cents,  and  bring  prices  up  to  one  hundred  cents. 
Here,  again,  we  have  another  proof,  amounting  to  absolute 
demonstration,  that  commercial  deposits  are  equivalent  to 
their  own  volume  in  bank-notes  :  they  are  a  part  of  the  sys- 
tem of  increasing  the  volume  of  general  prices  by  increasing 
the  volume  of  money  circulating  through  the  reserve.  It  is 
difficult  to  assign  any  exact  limit  to  the  possible  increase  of 
bank-notes  in  the  absence  of  deposit  loans  throughout  the 
commercial  world,  perhaps  impossible :  the  general  law  is 
that  already  stated.  The  practical  limit  is,  when  the  banker 
redeems  faster  than  he  issues  ;  that  is  an  exhortation  to  stop 
which  he  generally  heeds  if  solvent.  This  latter  limit,  which 
is  sure,  or  rather  would  be  sure  to  be  reached,  in  case  of  an 
overissue  of  notes  in  any  given  country,  were  there  no  de- 
posit loans,  constitutes  the  all  important  distinction  between 


CONTRACTION  AND  EXPANSION. 


468 


bank-notes  considered  by  themselves  and  deposits.  But  if 
bank-notes  may  be  issued  throughout  the  commercial  world, 
and  the  total  currency  in  it  indefinitely  increased,  so  long  as 
the  notes  continue  convertible,  why  should  the  notes  in  any 
case  be  returned  faster  than  the  banker  issues  ?  TLe  reason 
is,  because  the  first  overissue,  for  a  time,  creates  a  local  ex- 
pansion or  redundancy,  before  prices  throughout  the  commer- 
cial world  can  be  adjusted  by  means  of  a  general  distribution 
through  its  money-reserves,  and  because  so  long  as  the  coun- 
try where  the  overissue  takes  place  maintains  the  converti- 
bility of  the  notes,  this  insures  a  demand  for  gold  and  silver 
to  such  an  extent  that  a  large  export  of  metal  is  impossible, 
because  the  very  system  of  convertibility,  of  itself,  reduces  the 
total  to  the  average  amount  found  there.  Expansion  would 
be  even  more  likely  to  come  from  France  than  from  England 
and  the  United  States,  in  the  way  of  bank-notes,  were  it  not 
for  deposit  loans.  An  expansion  of  that  kind  in  France  could 
take  place  without  producing  any  immediate  disturbance  ;  it 
would  have  the  show  of  prosperity  in  the  way  of  advancing 
prices,  by  an  increase  of  bank-notes,  and  this  would  cause  an 
export  of  gold  to  and  expansion  in  England  and  the  United 
States,  and  thus  throughout  the  commercial  world.  With  her 
immense  stock  of  specie,  large  amounts  could  be  exported, 
and  the  convertibility  of  the  new  as  well  as  the  old  issues 
maintained.  Not  so,  however,  with  England  and  the  United 
States.  A  large  overissue  of  notes,  and  hence  export  of 
gold,  would  endanger  the  convertibility  of  the  note,  for  which 
the  whole  stock  of  specie  in  these  two  countries  is  virtually 
pledged.  These  are  the  true  reasons  why  an  overissue  in 
England  and  the  United  States  would  produce  a  depreciation 
and  return  of  the  notes  for  coin  before  the  depreciation  had 
proceeded  far ;  and  this,  in  the  absence  of  deposit  loans,  would 
be  a  practical  safeguard,  although  abstractly  the  only  limit 
of  issue  is  that  already  stated.  Deposit  loans  counteract  this 
law,  for  deposits  have  been  demonstrated  to  be  equivalent  to 
cash,  and  the  reserve,  the  consolidated  fund  out  of  which  they 
are  paid,  and  loans  maintained  at  average  volume. 

Can  deposits  without  loans  in  any  manner,  whatever,  inter- 
fere with  the  convertibility  of  the  note  ?    None  whatever. 


464 


POLITICAL  ECONOMY. 


Do  deposit  loans  interfere,  and  if  they  do,  how  ? 

If  deposit  loans  could  be  and  were  all  paid  up  in  England 
and  the  United  States  within  one  year,  the  result  woi*ld  be 
that  there  would  be  cash  on  hand  to  pay  depositors,  dollar 
for  dollar,  instead  of  a  reserve.  This  payment  could  not  be 
made  in  coin,  but  in  bank-notes  only ;  for  which  purpose  a 
large  additional  issue,  equal  to  the  whole  volume  of  commer- 
cial bank  loans,  would  be  required.  In  like  manner,  the 
payment  of  one  half  or  one  fourth  of  deposit  loans  would  re- 
quire the  same  process  in  less  degree.  An  expansion  of  bank 
loans  is  an  expansion  equivalent  to  the  issue  of  an  amount 
in  bank-notes  equal  to  the  expansion  of  loans,  because  every 
loan  diminishes  the  reserve  and  brings  it  by  that  amount 
nearer  zero,  while  the  amount  due  depositors,  and  therefore 
the  volume  of  deposits,  is  not  only  undiminished  but  may 
be  increased  by  the  new  loan  :  if  the  latter,  the  reserve  is 
diminished  relatively  by  an  increase  of  deposits  without  an 
increase  of  reserve:  if  notes  or  gold  are  paid  out,  the  reserve 
is  diminished  absolutely.  As  before  demonstrated  in  a  pre- 
ceding chapter,  it  is  immaterial  as  to  the  resulting  expan- 
sion whether  the  bank  gives  credit  or  pays  out  notes.  Hence 
it  follows  that  as  an  expansion  through  deposits  arises  from 
loans,  and  as  contraction  comes  only  by  payment  of  loans, 
there  can  be  no  contraction,  except  by  the  act  of  the  borrow- 
ers. Some  of  these  are  insolvent  and  unable  to  pay,  and  as 
there  can  be  no  contraction  except  through  solvent  borrow- 
ers, it  ought  to  take  place  immediately  through  these,  and  jet 
it  does  not.  But  if  there  is  an  overissue  of  bank-notes  they 
will  be  returned  for  redemption  in  the  absence  of  deposit 
loan  banks,  without  any  regard  to  the  person  who  first  bor-  , 
rowed  of  the  note-issuer.  His  solvency  or  insolvency  has 
nothing  to  do  with  the  fact  of  overissue,  or  the  remedy  by 
retiring  the  expansion.  But  why  should  expansion  proceed 
to  such  an  enormous  volume  as  it  always  has  done  before 
a  great  banking  and  commercial  crisis  in  the  United  States  ? 
Chiefly  because  the  excess  in  the  circulation  of  bank-notes 
is  returned  into  deposits,  for  the  most  part,  instead  of  being 
redeemed ;  and  deposits  always  continue  at  par  until  banks 


CONTRACTION  AND  EXPANSION. 


465 


suspend.  The  cause,  then,  which  produces  expansion  is  ex- 
cess of  loans  of  all  kinds,  while  the  cause  of  excessive  expan- 
sion above  that  of  a  metallic  currency  lies  in  bank-notes 
unredeemed  in  deposit.  The  cause  which  prevents  contrac- 
tion, is  the  inability  of  borrowers  to  pay.  But  why  does  not 
contraction  come  through  depositors  demanding  payment  of 
their  deposits,  as  note-holders,  in  the  absence  of  deposit  loans, 
would  of  their  notes,  long  before  such  a  stage  of  expansion 
has  been  reached,  as  always  precedes  every  great  crisis  ? 
Because  the  expansion  is  masked  to  depositors,  or,  in  other 
words,  deposits  never  depreciate  below  bank-notes  or  gold  so 
long  as  there  is  faith  in  the  ability  of  the  banker  to  pay  ; 
and  it  is  a  matter  of  fact  that  this  always  continues  until 
a  crisis  is  threatened.  The  reason  why  the  expansion  is 
masked  is  this  :  relative  contraction  in  the  field  of  final  dis- 
tribution (to  consumers)  has  already  taken  place  long  before 
the*  crisis  ;  that  is  to  say,  in  circulation.  This  began  to  take 
place  in  1855,  two  years  before  the  crisis  of  1857,  when  de- 
posits increased  largely  in  excess  of  circulation,  and  con- 
tinued to  increase  up  to  the  crisis  because  production  was  in 
advance  of  consumption  ;  the  increase  arising  largely  from  a 
deposit  of  bank-notes,  which,  in  the  absence  of  deposit  loans, 
could  create  no  expansion,  because  instead  of  a  deposit  there 
would  be  metallic  redemption  of  the  notes.  They  were  virt- 
ually redeemed  by  the  bankers  who  received  them  through 
deposit,  and  in  this  manner  became  liable  to  pay,  as  well  as 
the  issuers  :  instead  of  returning  them  for  redemption,  they 
used  them  to  make  new  loans.  But  a  relative  contraction 
in  the  small  reserves  of  those  to  whom  the  notes  were  paid 
for  labor  could  not  continue  without  ultimately  producing  a 
contraction  of  the  larger  ones  in  the  consolidated  reserve  of 
deposits,  and  thereby  an  equalization  ;  and  this  could  only 
come  by  forcing  payments  from  solvent  bank  borrowers. 
This  contraction  is  the  real  banking  or  money  side  of  the 
crisis,  and  the  spasm  of  panic  comes  by  sudden  bankrupt- 
cies, which  are  the  occasion  and  not  the  active  cause. 

A  crisis  on  a  comparatively  minor  scale  may  come  and 
go  without  a  panic.    The  real  crisis  is  a  reaction  from  ex- 


466 


POLITICAL  ECONOMY. 


cessive  loans,  gradually  expanding  until  their  practical  limit 
is  reached,  and  contraction  sets  in.  A  considerable  relative 
contraction  in  circulation  has  long  before  taken  place,  and 
it  would  have  taken  place  in  deposits  to  an  equal  extent 
had  it  been  possible.  Many  a  banker  can  bear  witness  that, 
long  before  the  ''panic,"  he  had  endeavored  to  contract  his 
line,  because  he  had  seen  the  importance  of  it ;  and  many  a 
banker  can  say  that  he  would  have  been  glad  to  increase  his 
reserve  largely  by  payments,  at  considerable  expense  to  him- 
self, had  it  been  possible.  But  why  does  not  this  feeling 
extend  to  depositors  ?  Because,  as  before  stated,  contraction 
has  already  taken  place  in  circulation  through  exhaustion  of 
means  and  diminution  of  the  power  to  borrow,  and  the 
money  is  not  wanted  then,  unless  and  until  a  panic  arises. 
When  that  is  at  hand,  those  who  are  indebted  for  overstock 
want  to  renew  their  loans,  or  borrow  at  one  bank  in  order  to 
pay  at  another,  and  thus  enable  them  to  maintain  their  credit 
and  hold  the  overstock  for  a  possible  market.  Production  of 
some  commodities  is  ahead  of  consumption.  The  latter  is 
at  nearly  normal  figures,  and  has  been  so  for  a  considerable 
time.  This  is  proved  by  the  contraction  which  has  already 
taken  place  in  circulation  because  it  has  begun  to  take  place 
in  production.  It  might  be  more  correct  to  say  that  cir- 
culation never  has  expanded  to  a  full  proportion  with  depos- 
its. The  same  law  which  sends  home  redundant  bank-notes 
for  redemption  has  sent  them  instead  into  deposits  as  the 
most  convenient  method  of  effecting  it.  The  resulting  dif- 
ference between  the  volumes  of  circulating  bank-notes  and 
deposits  represents  the  difference  between  actual  consump- 
tion and  temporarily  redundant  production.  Contraction  in 
the  former  (bank-notes)  takes  place  in  the  absence  of  deposit 
loans  by  sending  them,  the  moment  they  are  not  wanted, 
back  for  redemption.  Under  deposit  loans  they  are,  on  the 
contrary,  retired  by  the  holders  into  deposits,  and  ought  to 
remain  there  out  of  circulation  awaiting  redemption.  But 
instead  of  being  considered  as  a  debt  already  incurred  by  pro- 
duction, remaining  unpaid  for  want  of  a  consumer's  market, 
the  debt  is  largely  increased  by  new  loans,  which  have  no 


CONTRACTION  AND  EXPANSION. 


467 


other  foundation  than  that  of  an  already  insolvent  debtor. 
Contraction  in  loans  cannot  take  place  to  the  extent  de- 
manded, because  the  solvent  borrowers  have  too  large  "  lines 
of  accommodation  "  in  bank,  which  means  more  goods  than 
they  can  sell,  and  other  borrowers  are  absolutely  bankrupt 
through  unproductive  investments  of  their  money,  and  can- 
not pay  at  all.  Moreover,  too  much  pressure  would  bankrupt 
some  of  the  solvent  ones.  In  the  examination  of  this  subject, 
intricate  and  complex  as  it  undoubtedly  is,  the  danger  lies  in 
forming  opinions  and  adopting  conclusions  of  a  one-sided 
character,  by  looking  at  only  one,  instead  of  all  the  active 
causes  in  operation.  If  expansion  of  "  circulation  "  —  or,  in 
other  words,  money  —  occurs  according  to  the  exact  import 
of  the  word  while  bank-notes  are  convertible,  and  in  the 
absence  of  deposit  loans,  there  is  an  even  distribution  of  the 
increase  to  every  money  reserve  in  the  commercial  world  in 
due  proportion  ;  and,  as  before  stated,  it  is  impossible  to 
assign  the  limit  to  which  bank-note  circulation  might  be  car- 
ried if  the  increase  were  to  take  place  in  equal  proportion 
throughout  the  commercial  world.  So  long  as  the  notes  con- 
tinued convertible,  expansion  might  go  on  slowly  and  regu- 
larly until  volume  and  prices  were  more  than  doubled.  The 
expansion  which  took  place  from  time  to  time,  as  the  United 
States  issued  more  inconvertible  legal  tenders,  and  afterwards 
as  the  banks  issued  more  inconvertible  notes,  furnishes  an 
illustration.  The  impossibility,  however,  of  carrying  on  a 
regular  and  duly  proportioned  expansion  with  such  notes 
throughout  the  commercial  world  is  manifest,  and  the  true 
and  exact  science  of  the  whole  matter  lies  precisely  here  : 
general  expansion  comes  in  proportion  as  metal  goes  abroad 
or  into  hoards.  This  is  the  reason  why  an  unusual  issue  of 
convertible  bank-notes,  without  deposit  loans,  will  be  returned 
soon  after  their  being  paid  out.  They  are  not  wanted  for 
general  circulation,  to  go  into  every  money  reserve  in  equal 
proportion,  and  therefore  they  are,  in  point  of  absolute  truth, 
redundant  from  the  moment  of  their  issue.  They  are  paid 
out  for  labor,  to  increase  production,  and  enable  manufact- 
urers and  merchants  to  keep  larger  lines  than  consumption 


468 


POLITICAL  ECONOMY. 


demands,  and  to  enable  adventurers  to  pay  for  labor  that, 
for  the  present  at  least,  is  wholly  unproductive,  and  therefore 
they  are  retired  by  redemption. 

Here  we  see  in  broad  lines  the  distinction  between  local 
redundancy  and  general  expansion.  As  it  is  impossible  for 
the  notes  to  go  into  general  circulation,  it  is  certain  that 
they  must  be  redeemed  by  the  issuer  in  the  absence  of  de- 
posit and  discount  banks;  but  with  such  banks  a  deposit  with 
the  nearest  banker  is  a  matter  of  course.  Coin  is  not  wanted 
so  much  as  exchange  on  commercial  points ;  but  where  there 
are  only  banks  of  issue,  the  bills  drawn  upon  commercial 
centres  must  be  paid  in  metal  actually  delivered  to  pay  the 
debts  incurred  in  supplying  the  wants  of  the  laborers  who 
make  use  of  the  excess  of  notes,  as  well  as  the  wants  arising 
from  the  labor  and  production  of  the  country  in  general ; 
but  with  banks  of  deposit  and  discount  the  redemption  is 
by  checks  or  drafts  upon  bank  reserve  in  which  there  is  no 
certain  amount  of  metal.  It  would  be  a  great  mistake,  how- 
ever, to  infer  hastily  that,  because  there  is  no  general  expan- 
sion, but  only  a  local  redundancy  which  is  constantly  thrown 
back  to  a  large  extent  upon  deposits,  instead  of  being  retired 
by  a  redemption  of  the  notes,  there  is  therefore  no  expansion 
of  prices.  Mercantile  credit  comes  in,  if  at  all,  not  as  a  sub- 
stitute, but  as  supplementary  to  bank  loans  arising  from  the 
discount  of  the  paper  of  retail  merchants.  The  increased 
cost  of  goods  from  overproduction  is  thus  paid  by  consum- 
ers, until  by  the  general  crash  prices  are  forced  down,  and 
the  cycle  of  reaction  begins. 

The  commercial  world  has  no  share  in  and  pays  no  part 
of  the  losses  directly  resulting  from  this  action  and  reaction, 
by  way  of  participating  in  the  rise  or  the  fall.  The  imme- 
diate loss  is  borne  by  the  countries  afflicted  with  the  sys- 
tem, and  other  countries  lose  only  by  the  fluctuations  in 
trade.  Here  we  see  again,  from  an  international  point  of 
view,  the  principle  upon  which  a  minimum  banking  reserve 
would  operate  by  maintaining  all  production  in  harmony. 
But  again,  it  would  be  a  mistake  to  suppose  that  the  "  mul- 
tiplication "  of  bank-notes  is  the  only  active  cause ;  it  is  but 


CONTRACTION  AND  EXPANSION. 


469 


one  of  them.  There  is  also  a  further  expansion  of  deposits 
after  the  unredeemed  bank-notes  have  through  deposits  per- 
formed their  ofl&ce  of  paying  for  still  more  labor.  They  are 
increased  to  the  extent  of  profits  and  charges  paid  by  mer- 
chants who  buy  but  cannot  sell.  If  there  had  been  no  undue 
accumulation  of  unredeemed  notes,  loans  of  this  kind  would 
soon  have  come  to  an  end,  for  deposit  loans  are  the  usual 
means  of  purchasing  and  holding  the  goods  already  produced 
in  excess  by  loans  of  bank-notes  paid  out  to  laborers. 

The  rise  of  price  through  redundant  production  is  a  cause 
of  great  loss  to  the  United  States  and  England,  and  the 
true  remedy  is  to  make  general  prices,  by  which  the  cost  of 
living  to  the  laborers  is  determined,  as  steady  as  possible,  by 
establishing  a  fair  minimum  reserve,  for  which  there  has 
never  been  a  lack  of  gold  in  either  country. 

THE  PROCESS  OF  GRADUAL  EXPANSION  THROUGHOUT  THE 
COMMERCIAL  WORLD. 

It  has  been  shown  in  the  preceding  chapters  that  in  the 
absence  of  international  commerce  a  currency  of  gold  and 
silver  might,  with  the  exception  stated,  circulate  at  par  with 
a  currency  of  paper,  although  the  purchasing  power  of  the 
money  would  be  diminished  in  proportion  to  the  amount  of 
the  paper.  So,  in  like  manner,  in  the  absence  of  that  com- 
merce, a  convertible  currency  might  be  issued  by  any  com- 
mercial country  and  maintained  as  long  as  the  note  contin- 
ued convertible.  The  issue  would  be  checked  from  time 
to  time,  however,  because  an  accumulation  of  the  notes  in 
the  market,  which  would  unavoidably  take  place  before  they 
could  be  distributed  throughout  the  country,  would  produce 
a  redundancy  which  would  send  the  notes  home  for  redemp- 
tion. Still,  if  the  notes  were  issued  very  slowly  and  gradu- 
ally, an  expansion  could  be  produced,  the  only  limit  of  which 
would  be  the  line  between  convertibility  and  non-converti- 
bility ;  and  up  to  that  line,  if  the  notes  were  convertible  at 
the  proper  places  (commercial  centres),  they  would  be  on  a 
par  with  the  gold  and  silver,  and  the  notes  would  not  depre- 
ciate below  that  par.    The  fact  of  non-depreciation  in  con- 


470 


POLITICAL  ECONOMY. 


vertible  bank-notes  relatively  to  metal,  then,  is  clearly  made 
out,  and  this  is  all  that  Smith,  and  others  following  him, 
have  demonstrated. 

There  is  nothing  in  the  nature  of  gold  and  silver  coin  to 
limit  the  extent  of  their  depreciation  or  loss  in  purchasing 
power,  except  their  commodity  value  as  an  article  of  com- 
merce for  use  in  arts  and  manufactures.  This  creates  a  de- 
mand, but,  like  all  other  demands,  it  has  its  limit ;  and  that 
limit  is  another  and  rival  demand  for  them,  to  be  manufact- 
ured into  coin  for  currency.  In  the  conflict  of  these  de- 
mands one  will  sometimes  be  in  excess  of  the  other,  but  nei- 
ther gold  nor  silver  coin  can  ever  be  below  the  unit  par, 
although  sometimes  above  it.  That  in  all  cases,  however, 
gold  or  silver,  thus  continuing  at  par,  still  retains  its  former 
purchasing  power,  was  never  demonstrated  by  Smith  or  by 
anybody  else.  It  will  depreciate  as  well  as  paper,  but  there 
is  a  commodity  limit,  through  the  metal,  to  the  depreciation 
of  both.  Hence,  in  the  absence  of  all  banks,  isolated  govern- 
ments might  issue  inconvertible,  forced,  or  legal  tender  notes, 
which  would  rise  and  fall  in  purchasing  power,  —  that  is,  up 
to  and  below  the  par  of  gold,  —  from  time  to  time ;  and 
when  below  the  par  of  gold,  the  latter  would  be  used  more 
extensively  in  arts  and  manufactures.  The  introduction  of 
international  commerce  vvould  only  furnish  an  additional 
market  for  the  metal,  and  send  some  of  it  abroad,  but  the 
general  principle  of  expansion  would  be  the  same. 

Local  or  national  expansion,  then,  in  respect  to  the  volume 
of  money,  and  so  indirectly  of  prices,  may  be  applied  to  coin 
as  well  as  to  paper.  When  bank-notes  are  convertible  on 
demand  into  gold,  they  may  be  filled  up,  and  signed  by  the 
banker,  and  expended  by  the  borrower  for  labor  upon  a  rail- 
road, the  stock  and  debentures  of  which  will  sell  for  less  than 
half  cost  when  it  is  finished,  or  upon  mills  and  factories, 
which  are  left  unfilled  with  machinery  and  stock  because 
they  are  not  needed.  These  notes,  when  paid  out  to  the  la- 
borers, and  by  them  for  necessaries,  have  performed  their 
office,  and  ought  to  be  retired,  but  they  quickly  find  their 
way  to  the  banks  and  go  into  deposits,  which  are  but  a  con- 


CONTRACTION  AND  EXPANSION. 


4T1 


solidated  reserve.  If  a  deposit  of  these  notes  in  a  bank  were 
impossible,  for  want  of  a  bank  to  deposit  in,  they  would  go 
into  the  owner's  private  money  reserve,  either  in  the  shape 
of  notes  or  gold,  into  which  he  would  convert  them  through 
redemption  ;  and  chiefly  in  the  latter  shape,  for  reasons  be- 
fore given.  This  redemption  would  stop  farther  issues  and 
retire  the  redundancy  as  soon  as  it  occurred,  and  thus  reduce 
all  reserves  of  money,  whether  large  or  small,  to  the  old 
average  ;  or  rather,  it  would  prevent  them  from  increasing 
above  average  —  in  other  words,  in  excess  of  the  wants  of 
distribution  —  for  purposes  of  consumption.  But  the  short- 
est and  easiest  method  will  always  be  pursued  in  preference 
to  the  most  difficult,  and  so  the  redundancy,  instead  of  being 
retired  by  redemption,  is  retired  out  of  circulation  by  de- 
posit. The  banker  would  stop  loaning  if  he  were  called 
upon  to  redeem  the  deposited  notes  of  other  banks  in  gold 
purchased  at  high  rates  ;  but  the  increase  of  these  deposits, 
which  is  an  increase  of  the  grand  total  of  deposit  liabiHties, 
—  manifestly,  in  a  scientific  point  of  view,  evidence  of  weak- 
ness rather  than  of  strength,  and  an  index  to  the  coming 
storm,  —  appears  to  the  banker  and  to  the  commercial  world 
the  evidence  of  new  resources  for  further  loans,  instead  of 
a  debt  which  he  has  temporarily  assumed  for  the  bank  which 
issued  the  notes.  The  expansion  continues  because  it  is 
masked  in  deposits.  That  the  notes  deposited  are  not 
wanted  in  "  circulation  "  (that  is,  for  purposes  of  final  distri- 
bution through  real  commercial  exchanges)  is  daily  demon- 
strated by  their  return,  through  merchants  and  other  distrib- 
utors, into  deposit.  They  are  really  debts  which,  instead  of 
being  paid  by  the  debtors  who  issued  them,  are  taken  in 
exchange  for  their  own  debt  by  the  bankers  who  receive 
them  as  deposits,  and  are  thus  made  the  foundation  of  fur- 
ther loans  to  producers,  who  are  induced  to  increase  pro- 
duction when,  instead  of  increasing,  it  ought  to  stop  then 
and  there,  and  would  do  so  if  the  eyes  of  bankers  could  be 
opened  by  being  called  upon  to  redeem  their  notes  out  of  the 
commercial  world's  gold,  —  each  one  his  own,  and  his  own 
only.    The  same  thing  occurs  in  effect  where  the  currency 


472 


POLITICAL  ECONOMY. 


is  gold  and  silver,  with  deposit  banks,  but  the  rise  of  prices 
cannot  proceed  so  far  :  the  only  difference  is  in  the  range, 
but  not  in  tlie  ratio  of  variation. 

In  the  latter  case  the  reserve  (gold)  is  reduced  absolutely 
by  the  loan  of  gold  out  of  it,  to  pay  for  labor,  and  it  is  re- 
duced relatively  through  the  increase  of  deposits,  by  a  return 
of  the  same  into  deposit :  the  difference  between  this  and 
the  former  case  is  one  of  form  only.  Had  it  not  been  rede- 
posited  it  could  not  have  been  reloaned,  any  more  than  gold 
received  on  the  redemption  of  the  bank-notes  before  men- 
tioned in  tlie  supposed  absence  of  deposit  loans.  Circulation 
could  not  be  stimulated  to  an  increase  beyond  the  wants  of 
consumers  in  either  of  these  cases ;  and  the  law  (the  exist- 
ence of  which  has  been  demonstrated),  that  all  money  is  a 
series  of  reserves,  and  all  circulation  a  constant  depletion 
and  repletion  of  them,  so  as  to  maintain  an  average,  would 
in  both  cases  vindicate  itself  immediately.  In  the  same 
manner  the  large  reserves  composing  the  consolidated  re- 
serve, or  series  of  consolidated  reserves,  called  deposits,  — 
which  represent  the  accumulated  excess  of  production  over 
consumption,  —  must  suffer  the  necessary  depletion  in  the 
end:  it  is  only  postponed  by  the  deposit.  Contraction 
takes  place  most  where  there  has  been  most  expansion,  or 
rather  where  the  expansion  has  been  finally  located ;  and  it 
takes  place  in  bank  debt  resulting  from  redeposit,  by  retiring 
and  canceling  the  surplus  notes,  when  the  circulation  con- 
sists of  bank-notes,  and  b}^  restoring  to  banking  reserve  the 
gold  which  has  been  taken  from  it,  when  the  circulation 
consists  of  gold  and  silver ;  and  in  both  cases  the  first  step 
in  the  process  is  by  the  payment  of  bank  loans  ;  if  the  bor- 
rowers who  have  created  the  redundancy,  by  borrowing  and 
expending  unproductively,  cannot  do  it,  solvent  ones  must 
do  it  for  them.  This  contraction  is  the  banking  side  of  a 
crisis. 

But  to  what  purpose,  says  the  theorist,  who  believes  that 
deposits  are  not  the  equivalent  of  money,  but  merely  book 
debts,  —  although  he  may  admit  bank-notes  to  be  money,  — 
is  all  this  discussion  about  expansion  and  contraction,  which 


CONTRACTION  AND  EXPANSION. 


473 


only  involve  the  question  of  prices  ?  Much,  every  way  :  for  if 
a  matter  which,  through  a  general  redundancy  of  production, 
unprofitable  investment  of  labor,  and  consequent  rise  of 
prices,  leads  to  a  banking  and  commercial  crisis,  bankruptcy 
of  merchants  and  sometimes  of  banks,  by  gain  in  deposits, 
and  consequent  loss  of  reserve,  making  one  rich  and  another 
poor,  by  variation  in  the  reserve,  is  not  one  of  the  most  im- 
portant subjects  in  social  science,  it  will  be  hard  to  find  an 
important  one.  Loss  of  reserve,  relative  or  absolute,  is  ex- 
pansion :  gain  of  reserve  is  contraction  :  variation  of  reserve 
is  putting  one  man's  hand  into  another  man's  pocket,  and 
resembles  an  expansion  through  an  irredeemable  currency 
m  its  effects.  The  question  of  high  and  low  prices  is  of 
no  importance  per  se,  but  relatively.  It  is  important  for 
every  country  to  have  prices  as  low  as  they  are  anywhere  in 
the  commercial  world,  and  to  hold  them  steady,  if  it  desires 
to  keep  distribution  from  becoming  a  game  of  chance,  and 
to  have  an  even  distribution,  or  as  even  as  possible,  of  wealth 
and  of  money.  The  essential  difference,  then,  between  a 
metallic  currency  and  a  convertible  bank-note  currency  with 
banks  of  deposit  and  discount,  and  without  a  regulated  re- 
serve, consists  only  in  the  range  of  expansion  to  which  prices 
are  carried  by  bank  loans,  and  not  in  the  principle  which 
underlies  the  expansion.  If  banking  reserve  were  maintained 
at  a  fixed  ratio  to  debt,  one  banker  could  not  redeem  another 
banker's  notes  for  him  by  taking  them  into  deposit,  —  thus 
making  the  deposit  the  foundation  of  another  loan,  —  instead 
of  redeeming  the  notes  in  gold.  If  A.,  a  depositor,  brings 
to-  B.,  a  banker,  ten  thousand  dollars  in  bank-notes  of  an- 
other bank,  to  deposit,  when  B.  has  a  metallic  reserve  of  one 
million,  which  is  the  legal  minimum,  and  owes  five  millions, 
B.  cannot  receive  them  without  first  buying  two  thousand 
dollars  in  gold  and  putting  it  in  his  reserve  in  order  to 
maintain  the  ratio.  This  he  will  not  do,  because  he  will 
wait  until  the  reserve  replenishes  itself,  as  it  ought,  through 
the  exchanges.  A.  will  therefore  be  compelled  to  send  the 
notes,  or  at  least  one  fifth  of  them,  for  redemption  to  the 
issuer,  before  he  can  deposit  them.    As  a  practical  result, 


474 


POLITICAL  ECONOMY. 


the  notes  will  not  circulate  in  excess  of  that  ratio  of  reserve 
to  bank  liability. 

The  foregoing  examination  gives  a  subjective  view  of  de- 
posits and  circulation  as  they  appear,  without  reference  to 
the  motive  forces  whicli  control  them  in  the  character  of 
banks  and  borrowers.  The  subject  cannot  be  understood 
without  studying  those  forces  as  the  paramount  active  cause. 
This  chapter  shows  only  the  phenomena  as  they  appear  in 
circulation  and  deposits.  Such  an  examination  is  of  itself 
entirely  insufficient.  It  is  not  surprising  that  political  econ- 
omy is  considered  dry  and  unsatisfactory.  It  can  never  be 
fully  developed  until  the  forces  which  move  the  social  ma- 
chine are  carefully  studied,  as  well  as  the  instruments  by 
which  they  act. 

Finally,  ought  bank-notes  under  five  dollars  to  be  forbid- 
den after  a  return  to  convertibility  ?  The  answer  must  be, 
that  if  banking  is  to  be  conducted  in  the  future  as  it  has  been 
in  the  past,  without  any  regulation  of  the  reserve,  the  exclu- 
sion of  such  notes  would  necessarily  force  a  considerable 
amount  of  coin  into  circulation.  This  would  contract  the 
total  volume  of  outstanding  circulation,  and  limit  the  range 
of  variation  of  prices  to  a  considerable  extent,  in  the  same 
manner  as  in  England.  There  a  limitation  still  more  com- 
plete exists  by  the  use  of  a  still  larger  proportion  of  coin  ; 
but  the  range  only,  and  not  the  ratio  of  variation,  would  be 
affected,  as  elsewhere  shown. 


CHAPTER  XXVIL 


THE  STIMULUS  TO  SPECULATIVE  PRODUCTION  AND  SPECU- 
LATION, FROM  THE  INCREASING  PERSONAL  MANAGE- 
MENT OF   CORPORATE   AND   FIDUCIARY  CAPITAL. 

A  VAST  amount  of  capital  has  passed  into  the  control  of 
corporations  in  England  and  the  United  States  within  the 
time  of  the  present  and  past  generation.  Charters  in  the 
United  States  cost  little,  and  organizations  which  create  cor- 
porations in  the  United  States,  for  the  most  part,  take  place 
by  filing  articles  of  association.  The  property,  being  con- 
trolled by  directors  who  are  trustees,  is  thus  nominally  fidu- 
ciary. I  say  nominally,  for  such  it  is  for  the  most  part. 
The  real  management,  not  only  executive,  but  deliberative,  in 
the  largest  number  of  instances,  lies  with  one  or  two  of  the 
directors.  The  result  is,  that  the  capital,  instead  of  being 
managed  as  a  trust,  is  frequently  used  as  if  it  were  the 
private  property  of  the  managers,  who  thus  become  specula- 
tors. In  this  way  the  property  loses  that  cautious  oversight 
which  self-interest  compels  every  private  person  to  use  in  re- 
spect to  what  is  his  own.  The  stockholders  thus  take  all 
the  risks  of  new  enterprises,  which  are  undertaken  for  them 
without  their  consent,  and  lose  to  a  great  extent  the  profits,  if 
exceptionally  any  accrue.  These  go  largely  to  the  speculator, 
acting  his  part  like  the  profane  wretch  in  the  old  fable,  who 
took  the  kernels  of  the  nuts  for  his  own  use,  and  devoted  the 
shells  to  the  gods.  All  this  results  from  carrying  what  may 
be  called  an  inevitable  tendency  to  an  extreme.  I  say,  in- 
evitable tendency,  because  the  management  of  railroads  and 
their  connections  has  become  an  art  or  science  by  itself,  and 
the  managing  directors  necessarily  lead  the  minds  of  their 
co-directors  and  stockholders.   The  mischief  lies  in  permitting 


476 


POLITICAL  ECONOMY. 


this  tendency  to  run  to  excess.  This  tendency,  thus  carried 
to  extremes,  is  sustained,  and  in  some  instances  exaggerated, 
by  the  aid  of  stock  speculations ;  and  these  latter  require  the 
aid  of  banks.  Vast  amounts  of  railroad  capital  have,  by 
the  aid  of  stock  speculations,  been  carried  into  a  few  hands. 
These  unfortunate  results  unquestionably  exerted  a  powerful 
influence  upon  the  minds  of  the  "  strikers,"  as  well  as  the  de- 
stroyers of  property  in  the  late  industrial  disturbances  in  the 
United  States.  Labor  had  no  just  cause  of  complaint  against 
the  men  whom  I  have  called  speculators,  some  of  whom  had, 
without  capital,  obtained  control  of  railroads,  and  the  re- 
mainder of  whom  had  not  only  obtained  control,  but  also, 
through  speculation,  a  controlling  interest  in  certain  roads. 
The  true  ground  of  complaint  was  a  joint  one  in  behalf  of 
the  capital  which  had  originally  built  and  equipped  the  roads, 
and  the  labor  which  has  of  late  been  turned  away  from  the  mak- 
ing of  pig  iron,  bars,  railroads  and  rolling  stock,  against  that 
system  of  producing  on  credit,  by  the  aid  of  loans,  and  specu- 
lating meanwhile  upon  the  product,  which  had  lost  the  con- 
tributing capitalists  much  of  their  capital  and  set  the  work- 
men adrift.  In  other  words,  the  cause  was  real,  but  never- 
theless intangible :  nobody  was  to  be  blamed  for  its  exist- 
ence, and  everybody  ought  to  pity  everybody  who  suffered 
by  it,  as  everybody  who  saw  and  heard  the  performance 
was  called  upon  to  pity  GEdipus  in  the  tragedy  of  fate. 
When  wealth  is  produced  in  harmony,  there  is,  on 'the  whole, 
a  harmonious  distribution  of  it,  but  when  it  is  not  produced 
in  harmony,  that  which  is  produced  in '  excess  must  neces- 
sarily be  produced  on  credit  ;  and  production  on  credit, 
carried  to  the  point  of  a  crisis,  ends  in  bankruptcy.  A  large 
part  of  the  resulting  loss  becomes  the  gain  of  a  small  num- 
ber of  shrewd  and  lucky  speculators.  It  has  been  said  that 
more  than  four  fifths  of  the  merchants  fail.  If  such  be  the 
fact,  a  considerable  part  of  the  loss  must  fall  upon  the  banks, 
by  whose  loans  the  result  is  brought  about.  The  banks  are, 
for  all  practical  purposes,  guarantied  partners,  with  profits 
fixed  and  prepaid  in  the  shape  of  interest.  In  case  of  fail- 
ures, the  only  fund  out  of  which  the  guaranty  can  be  made 


THE  STIMULUS  TO  SPECULATIVE  PRODUCTION.  477 


good  is  producer's  assets.  Hence  the  management  of  banks 
necessarily  relates  to  the  most  important  of  all  the  produc- 
tive agencies ;  for  the  principal  part  of  production  on  credit 
is  effected  by  their  loans.  And  how  are  they  managed  ?  Do 
boards  of  directors  determine  the  amount  and  character  of 
loans  ?  In  the  nature  of  things  it  is  impossible.  Boards  of 
directors  are  called  upon,  for  the  most  part,  to  sustain  a  line 
of  discounts  already  existing,  or  to  discount  at  the  suggestion 
of  executive  officers.  The  business  of  the  manufacturer  and 
merchant  requires  dispatch,  and  equal  dispatch  is  demanded 
of  their  partners,  the  banks.  In  the  nature  of  things  this 
must,  to  a  considerable  extent,  have  always  been  so,  and  of 
late  years  it  has  been  still  more  so.  The  character  and  busi- 
ness of  banks  depend,  mostly  upon  the  management  of  exec- 
utive officers.  Bank  loans  are  the  agency  by  which  the  road- 
bed and  rolling  stock  of  the  Northern  Pacific  Railroad  were 
built ;  bank  loans  are  the  agency  by  which  the  speculations 
in  stock  are  conducted  and  labor  paid  to  construct  branches 
for  main  hues,  whether  stockholders  are  consulted  or  not. 
Hence  the  danger  which  always  lies  at  the  door  of  Bank 
Loans,  even  when  well  managed  by  efficient  boards,  who 
take  a  personal  interest  in  the  discounts.  But  how  much 
has  the  danger  increased,  when,  to  a  considerable  extent,  the 
tendency  to  executive  usurpation  existing  in  railroads  has 
been  carried  into  banks?  There  is  but  one  remedy,  and 
that  is,  to  limit,  if  possible,  discounts  in  all  banks  at  some 
definite  point  fixed  by  law,  beyond  which  no  discounts  can 
be  made.  To  fix  that  limit  is,  as  already  demonstrated,  to 
fix  a  universal  limit,  for  the  whole  country,  to  production  ; 
to  stop  the  making  of  pig  iron,  bars,  road-bed,  rolling  stock, 
cloth,  etc.,  at  a  certain  point,  declaring  that  production  on 
credit  shall  proceed  no  farther  until  stock  on  hand  is  sold 
and  loans  paid  ;  to  limit  stock  speculations  at  a  certain  point, 
and,  by  regulating  all  prices,  to  place  such  speculations  on 
a  true  basis. 


CHAPTER  XXVIII. 


THE   SPECIE   PAR   OF    GOLD   AND   SILVER:    BALANCE  OF 

TRADE. 

Gold  and  silver,  by  weight,  measure  the  exchangeable 
values  of  all  commodities  passing  into  international  com- 
merce, and  hence,  if  they  follow  any  law  in  their  distribution 
through  the  commercial  world,  it  must  be  in  proportion  to 
the  value  of  commodities  passing  into  that  commerce  from 
each  nation,  in  the  absence  of  bank  and  government  issues. 
But  there  is  absolute  proof  to  this  effect.  If  a  nation,  through 
failure  of  crops,  is  compelled  to  import  grain,  the  gold  it 
sends  out  is  largely  returned,  and  the  loss  mostly  paid  out  of 
capital,  to  be  made  good  at  a  future  time. 

There  is  a  forced  export,  in  such  a  case,  of  other  commodi- 
ties, or  capital  in  the  shape  of  securities,  to  make  up  most  of 
the  deficiency ;  and  the  loss  of  gold  is  in  exact  proportion  to 
the  diminution  of  exports  below  average,  in  consequence 
of  the  failure  of  crops ;  which  inversely  proves  the  proposi- 
tion. 

The  value  of  commercial  gold  or  bullion  fluctuates,  ad- 
vances, or  recedes,  in  proportion  to  the  demand  for  it  as  a  use- 
ful commodity  in  manufactures  and  arts,  the  increasing  or 
diminishing  ratio  of  supply  from  the  mines,  and  the  greater 
or  less  variation  in  the  ratios  of  the  total  annual  product 
of  commercial  gold,  and  the  total  annual  increase  of  inter- 
national commerce.  If  there  were  no  such  commerce,  there 
would  be  found,  on  comparison,  a  much  greater  variation 
between  the  ratios  of  the  totals  of  gold  and  silver  and  the 
total  amounts  of  commodities,  entering  into  internal  com- 
merce in  each  country ;  because,  taking  the  whole  commercial 
world  together,  these  differences  correct  each  other,  and  one 


THE  SPECIE  PAR  OF  GOLD  AND  SILVER. 


479 


uniform  average  is  established,  which  is  the  limitation  di- 
rectly of  all  purchasing  power  in  the  international  markets, 
and  would  be  in  the  national  markets  if  there  were  no  banks 
of  deposit  and  discount,  and  no  inconvertible  paper  issued 
by  governments  or  banks.  The  balance  of  trade  is  the  differ- 
ence between  the  value  of  the  articles  exported  and  the  arti- 
cles imported  in  favor  of  any  country,  and  paid  in  gold  and 
silver.  The  difference  so  paid  to  any  country  was  thought 
to  be  highly  desirable  because  the  metal  was  the  only  real 
wealth ;  at  least  it  is  so  asserted  by  writers.  But  this  is  only 
false  reasoning  to  maintain  what  was  really  a  sound  propo- 
sition. The  "  balance  of  trade  "  was,  as  it  still  is,  desirable, 
because  it  shows  economy  on  the  part  of  the  nation  having 
the  balance.  The  balance  in  the  shape  of  metal  is  a  power 
to  obtain  an  equivalent  in  goods,  or  to  cause  an  equivalent 
production  to  take  place  in  future.  But  there  is  a  limit,  and 
a  very  short  one,  too,  to  such  economy,  because  other  nations 
must  soon  be  unable  to  exchange  unless  the  economy  is  aban- 
doned or  confined  within  narrow  limits.  It  is  a  question  of 
mutual  action  and  reaction,  and  of  mutual  condition  result- 
ing. The  doctrine  of  the  balance  of  trade  within  its  practi- 
cal limits,  and  showing,  as  it  does,  economy  or  good  fortune 
in  not  meeting  with  losses  through  failure  of  crops,  rela- 
tive overproduction  and  unproductive  consumption,  is  sound 
enough.  It  is  only  saying,  that  the  economy  commended  in 
individuals,  showing  its  effects  in  a  larger  relative  command 
or  possession  of  money,  is  sound  in  its  general  as  well  as  its 
particular  results,  practically  limited  as  it  is  by  the  possi- 
bilities of  international  trade.  The  supposed  mistake  of 
those  who  argued  for  the  balance  of  trade  was  that  they 
carried  out  to  its  logical  conclusion  the  theory  of  mercantile 
value  in  money  as  a  commodity,  not  only  in  national  trade 
and  the  accumulations  growing  out  of  it,  but  also  in  inter- 
national trade.  But  if  money  has  value,  because  it  is  an  end 
in  itself,  why  should  not  the  end  reach  into  international, 
and  why  should  it  stop  with  national  trade  ? 

Hence,  as  gold  and  silver  are  thus  distributed  in  accord- 
ance with  a  certain  law  of  uniform  action,  it  is  impossible  to 

1 


480 


POLITICAL  ECONOMY. 


carry  or  export  either  of  them  and  cause  it  to  remain  perma- 
nently in  the  place  to  which  it  is  carried  or  exported  in  op- 
position to  the  law  which  governs  the  distribution,  unless  it 
be  buried  or  hoarded,  cast  into  the  sea,  or  manufactured ; 
and  it  could  thus  be  disposed  of  only  to  a  very  limited  ex- 
tent, because  it  could  not,  in  larger  amounts,  be  obtained : 
the  amount  so  obtained  would  not  be  missed  from  the  gen- 
eral mass.  If  exported  and  converted  into  money  or  mer- 
chandise, or  sold  in  any  form,  it  would,  for  the  most  part, 
return.  Therefore,  as  long  as  gold  and  silver  continue  to  be 
the  measure  of  values  in  the  commercial  world,  neither  Eng- 
land nor  France  will  be  able  to  get  rid  of  their  portions  by 
sale:  their  banks  may  retire  gold  occasionally,  through  ex- 
port, by  reason  of  a  movable  or  fluctuating  reserve,  as  ex- 
plained elsewhere,  but  it  will  soon  return.  Hence  it  would 
be  impossible  for  the  Bank  of  England,  or  the  Bank  of 
France,  to  dispose  by  sale  of  a  large  .portion  of  bullion,  per- 
manently, unless  they  can  vary  their  reserves  at  pleasure.  It 
could  only  be  sold  or  lent  to  subserve  a  temporary  object, 
because  the  export  of  gold  would  be  followed  by  an  import. 
This  assertion  is  further  verified  in  the  chapter  on  Banks. 
A  permanent  disturbance  of  the  distribution  of  gold  and  sil- 
ver, with  a  fixed  ratio  of  reserve,  is  as  impossible,  therefore, 
as  to  prevent  the  restoration  of  equilibrium  between  positive 
and  negative  electricity.  An  artificial  and  temporary  dis- 
turbance can  occur,  when  the  reserve  is  not  thus  fixed.  This 
is  the  first  par  of  purchasing  power. 

The  second  par  of  purchasing  power  of  gold  and  silver  is 
the  convertible  one,  —  the  notes,  which  represent  what  may 
be  called  a  loan  of  gold  from  the  commercial  world,  being 
redeemed  upon  demand  at  a  commercial  centre.  Gold  is  in 
demand  here,  first  and  chiefly,  for  the  purpose  of  redeeming 
the  notes,  and  the  gold  in  the  country  outside  of  the  re- 
demption reserves  in  banks,  and  not  in  circulation,  as  well 
as  these  reserves  themselves,  may  be  regarded  as  a  part  of 
the  redemption  fund,  because  if  the  notes  cease  to  be  con- 
vertible, the  gold  will,  to  a  greater  or  less  extent,  leave 
the  country,  or  retire  out  of  circulation.    Under  this  par, 


THE  SPECIE  PAK  OF  GOLD  AND  SILVER.  481 

gold  and  notes  are  on  a  par  with  each  other,  but  both,  never- 
theless, may  be  below  the  value  of  gold  as  the  money  of 
international  commerce  —  in  other  words,  commercial  gold  — 
from  two  causes :  first,  deposit  loans,  which,  increasing  the 
amount  of  loans,  in  the  markets  of  merchandise  and  labor, 
that  could  exist,  either  under  a  gold  and  silver  or  a  paper 
currency,  without  banks  of  discount,  artificially  raise  general 
prices  to  the  extent  of  the  increased  volume  of  business,  and 
the  additional  interest  and  risks  of  all  kinds  thereby  arising, 
thus  producing  a  perpetual  expansion  and  contraction  of 
prices ;  and  this  expansion  is  masked,  until  borrow^ers,  or 
banks,  or  both,  become  bankrupt  or  disabled.  It  is  generally 
believed  and  insisted,  by  that  class  of  writers  on  money  who 
are  called  bullionists,  that  this  expansion,  which  they  not 
only  admit,  but  have  jDointed  out,  arises  from  bank-notes, 
and  not  deposit  loans.  But  I  have  demonstrated  in  other 
chapters  that  they  are  mistaken,  because  before  deposit  loans 
began  the  total  of  loans  in  the  markets  was  onl}^  equal  to 
banking  capital ;  they  were  more  than  doubled  by  the  estab- 
lishment of  deposits  and  deposit  loans,  and  they  could  be  re- 
duced to  their  original  dimensions  by  the  retirement  of  de- 
posit loans ;  and  moreover,  they  have  never  shown  the  falsity 
of  Adam  Smith's  testimony  relative  to  convertible  notes,  nor 
can  they.  Hence  this  artificial  rise  of  prices,  which  can  no 
more  be  denied  as  a  fact  than  Adam  Smith's  testimony,  can 
arise  only  from  the  cause  1  have  given ;  that  cause  explains 
all  the  phenomena,  and  no  other  will.  The  second  cause, 
which  raises  general  prices,  and  therefore  increases  the  ex- 
pansion of  the  circulation  of  bank-notes,  and  consequently 
depreciation  of  their  purchasing  power,  and  thus  of  the  gold 
into  which  they  are  convertible,  as  compared  with  general 
prices  throughout  the  commercial  world,  is  a  tariff  on  im- 
ported or  tax  on  domestic  goods.  This  is  properly  only  an 
aggravation  of  the  first  cause.  If  the  currency  of  a  country 
were  exclusively  gold  and  silver,  without  deposit  loans,  the 
distribution  of  the  money  being  perfect,  because  natural,  and 
it  being  impossible  to  attract  gold  and  silver,  which  are  limited 
in  quantity^  from  other  countries  when  general  prices  are  at 

31 


482 


POLITICAL  ECONOMY. 


an  average,  to  the  country  having  the  tariff  or  tax,  in  order, 
by  raising  its  general  prices,  to  equalize  the  loss  arising  from 
the  tariff  or  tax,  equalization,  and  thus  compensation,  can 
only  be  brought  about  by  a  general  fall  of  prices  equal  to 
the  effect  which  ought  to  result  from  forcing  out  of  private 
reserves  into  the  treasury,  and  keeping  there'*,  the  average 
amount  of  gold  and  silver  which  remains  there  in  conse- 
quence of  the  tariff  or  tax,  and  is  in  excess  of  what  would  be 
found  there  if  there  were  no  such  tariff  or  tax.  If  any  arti- 
cle is  protected  or  intended  to  be  protected,  therefore,  the 
full  benefit  of  protection  will  be  at  once  realized  under  such 
a  currency,  because  there  can  be  no  expansion  of  circulation 
to  counteract  it.  The  contrary  of  all  this  occurs  when  there 
is  either  a  metallic  or  paper  circulation  with  banks  of  deposit 
and  loan.  Equalization  and  compensation  for  taxes  laid  on 
commodities  will  occur,  wherever  it  is  possible^  by  a  corre- 
sponding rise"  of  prices  in  other  things,  and  that  is  possible 
when  either  a  paper  or  metallic  circulation,  or  a  convertible 
paper  circulation  with  banks  of  deposit  and  discount,  is  found, 
simply  because  the  circulation  of  money  is  not  limited  by 
the  natural  law  of  distribution  of  commodities,  but  by  their 
production.  A  much  larger  portion  of  the  tax  is  thrown 
back  upon  the  protected  producer  by  other  consuming  pro- 
ducers, through  a  corresponding  rise  in  their  produce  to  off- 
set the  rise  in  his,  than  could  occur  under  a  currency  of  gold 
and  silver,  or  convertible  notes  without  deposit  and  discount 
banking,  or  with  such  banking  under  a  regulated  reserve. 
The  expansion  of  bank-notes  to  meet  this  demand  for  the 
equalization  of  prices,  under  deposit  and  discount  banking, 
produces,  upon  the  principles  already  demonstrated,  an  equal 
expansion  of  all  money  reserves,  by  the  expansion  of  circula- 
tion of  all  money  outside  of  banks  and  the  equal  expansion 
of  deposits.  The  cost  of  producing  the  protected  article,  at 
the  same  time,  rises  in  proportion  to  the  overstock,  and  the 
protection  of  the  producer  is  lost.  The  third  kind  of  par 
arises  when  the  redemption  of  bank-notes  is  suspended,  but 
they  nevertheless  continue  at  par,  as  explained  in  the  chapter 
on  Bank-notes,    The  notes  are,  in  this  case,  distributed  with 


THE  SPECIE  PAR  OF  GOLD  AND  SILVER.  483 


the  gold,  and  therefore  evenly,  unless  there  are  deposit  banks 
and  loans  ;  but  with  or  without  the  latter,  the  notes,  and 
therefore  the  gold,  may  be  very  much  depreciated  in  purchas- 
ing power  below  that  of  the  same  notes  if  they  were  con- 
vertible. Gold  and  silver  coin  and  bullion  being  the  money 
of  international  commerce,  and  being  both  equally  bullion, 
and  bartered  as  commodities  according  to  the  rates  of  ex- 
change between  the  two  metals  for  the  purpose  of  paying 
those  balances  which  ordinary  merchandise  is  insufficient  to 
pay,  the  latter  being  first  valued  in  the  money  of  the  coun- 
try producing  them,  and  then  in  the  money  of  the  country 
to  which  they  are  sent,  with  a  currency  of  silver  and  gold 
throughout  the  world,  whether  equally  distributed  by  gen- 
eral monetization,  or  unequally,  by  monetization  of  one  of 
the  metals  in  one  or  more  countries,  and  the  other  metal  in 
other  countries,  the  purchasing  power  of  both  metals  would 
be  brought  to  a  fair  average,  after  allowing  for  distances, 
costs  of  carriage,  etc.  The  average  would  be  maintained 
with  duly  convertible  notes  of  banks  of  issue  without  the 
functions  of  deposit  and  discount,  like  those  of  the  Scotch 
banks  in  Adam  Smith's  time,  or  with  an  issue  of  govern- 
ment paper  to  an  extent  sufficiently  short  in  total  amount 
of  what  could  be  the  total  circulation  if  metallic  ;  for  in- 
stance, an  issue  of  two  hundred  millions  of  treasury  notes 
by  the  United  States,  upon  the  return  of  convertibility. 
The  average  par  which  would  thus  exist  throughout  the 
commercial  world  with  such  a  currency,  —  all  other  issues 
by  banks  or  governments  being  excluded,  —  would  be  steadily 
maintained,  the  conditions  supposed  remaining.  The  only 
movement  of  gold  or  silver,  then,  would  be  in  the  tracks  of 
commerce.  But  with  an  artificially  increased  circulation, 
either  of  gold  and  silver  or  convertible  bank-notes,  the  m^tal 
could  be,  as  it  has  been,  carried  from  one  country  to  another, 
by  loans  out  of  banking  reserves,  without  reference  to  com- 
merce. It  can  be  taken  from  one  country  to  another  in  this 
way  (to  remain  but  a  short  time  of  course),  but  the  fact  that 
it  can  be  so  carried  results  from  the  fact  that  the  metallic 
banking  reserve  whence  it  is  taken  is  no  regulator  at  all  of 


484 


POLITICAL  ECONOMY. 


the  circulation  of  money,  but  is  itself  regulated  by  bank 
loans  ;  by  the  production  rather  than  the  commerce  of  com- 
modities. 

The  metallic  par  of  value  in  exchange  is  so  far  controlled 
by  the  credit  par  instead  of  itself  controlling  the  latter. 

The  term  Par  can  therefore  be  affirmed  of  gold  and  silver 
in  the  same  sense  in  which  it  may  be  of  bank-notes,  and  in 
no  other.  Premium  on  either  gold  or  silver,  as  compared 
with  bank-notes,  is  accidental. 


CHAPTER  XXIX. 


STANDARD,  DOUBLE   STANDARD,  AND    METALLIC  SUPPLY. 

Standard,  as  applied  to  silver  or  gold,  is  born  of  Com- 
modity. If  money  is  a  series  of  units,  localized  in  metal,  or 
bank  or  government  notes,  "  circulated  "  by  placing  it  in  the 
denominator  of  a  ratio,  the  numerator  of  which  is  the  num- 
ber of  units  of  goods  sold,  the  quotient  being  Purchasing 
Power,  or  one  or  more  of  a  like  series  of  units  of  metal  or 
notes,  placed  in  the  numerator  of  a  ratio,  the  units  of  goods 
being  placed  in  the  denominator,  the  quotient  being  Price, 
Money's  Worth,  or  Conventional  Value  in  Actual  Exchange, 
then  certainly  there  is  no  such  thing  as  Standard  in  relation 
to  money,  except  the  Standard  Unit.  Conventional  value, 
as  applied  to  money,  is  of  two  kinds  :  first,  the  general  con- 
vention, evidenced  by  general  use.  If  one  metal,  like  gold, 
be  in  use  throughout  the  commercial  world,  the  units  of  val- 
uation, purchase,  and  payment  must  be  to  eagh  other,  in 
point  of  general  conventional  value  or  purchasing  power,  as 
their  respective  weights  :  and  if  silver  be  also  in  use,  then  the 
ratio  of  general  conventional  value  between  the  units  of  each 
metal  becomes  that  of  mass  to  mass,  in  coin  ;  secondly,  con- 
ventional value  in  actual  exchange  for  commodities,  which 
is  the  carrying  into  effect  of  the  first  convention.  Hence  there 
is  practically  room  for  great  variation,  whatever  the  units  of 
valuation  may  consist  of,  whether  it  be  metal  or  paper. ^  A 

1  As  every  purchase,  whether  at  wholesale  or  retail,  is  made  by  means  of  a 
ratio  or  division  of  units  of  commodities  by  units  of  money,  —  the  quotient 
being  multiplied,  divided,  or  neither  multiplied  nor  divided,  according  to  the 
circumstances  of  each  case,  to  ascertain  price,  the  standard  result  or  average 
price  must  be  ascertained  by  adding  and  averaging  the  results  of  all  the  pur- 
chases of  the  same  kind  which  are  taking  place.  This  will  give  the  standard 
result  of  numerous  standard  variations,  which  is  absurd.  There  is  no  standard 


486 


POLITICAL  ECONOMY. 


thing  which  is  constantly  varying  can  never  be  a  Standard 
in  a  true  sense.  That  money  of  all  kinds  must  necessarily 
vary,  according  to  the  number  of  its  units  placed  in  the  num- 
erator, to  furnish  Price,  or  in  the  denominator,  to  furnish 
Conventional  Value  in  Exchange,  is  mathematically  certain ; 
and  that  it  is  constantly  so  varying  is  certain  in  point  of  fact. ^ 
Hence  gold  coin  is  neither  Commodity  nor  Standard,  be- 
cause it  is  utterly  absurd  to  call  a  unit  in  the  numerator  or 

then  in  this  sense.  But  a  standard  metallic  commodity  is  equally  impossible, 
because  for  the  last  fifteen  years  the  premium  on  gold  has  been  no  standard 
test  of  the  exchangeable  value  of  paper  money.  This  demonstrates  that  gold 
does  not,  as  a  standard  commodity,  measure  the  exchangeable  value  of  any 
paper  money.  Varying  itself  in  this  manner,  there  can  be  no  analogy  between 
it  and  the  "  standard  yard-stick,"  as  is  sometimes  affirmed  by  writers  on  money. 
The  only  sense  in  which  it  can  be  a  standard,  then,  is  the  absolute  necessity  of 
dividing  it  into  pieces  of  a  given  Aveight,  in  order  that  it  may  perform  its 
functions  as  a  series  of  units,  limited  by  the  quantity  of  metal  in  each  to  ex- 
change all  commodities,  labor  and  capital.  The  only  standard  possible  or  con- 
ceivable, when  money  is  subjected  to  rigorous  analysis,  is  the  standard,  because 
absolute  necessity,  of  making  such  division  before  money  can  be  used,  not  as 
an  ordinary  commodity  to  exchange  for  some  other  commodity  by  way  of  bar- 
ter, but  as  a  series  of  units  of  a  commodity,  for  the  units  of  all  commodities. 
To  all  commodities  and  all  capital  whatever,  it  can  bear  no  relation  but  that  of 
units,  nor  can  these  bear  any  uniform  relation  but  that  of  units  in  the  abstract 
to  money.  The  relations  of  use  between  different  commodities,  which  are 
duly  estimated  on  the  spot  when  they  are  brought  together  for  barter,  give 
way  when  a  unit  of  metal  is  given  for  a  unit  or  for  units  of  commodities, 
to  a  mere  abstract  relation  of  number  as  to  the  money,  because,  though  the 
metal  in  the  coin  has  such  relations  of  use,  or  more  properly  would  have  such 
relations,  if  exchanged  for  another  commodity,  it  has  no  conceivable  relation, 
even  as  bullion  to  all  other  commodities,  but  that  of  number ;  and  it  cannot  be 
numbered  unless  divided.  There  is  only  one  other  sense  in  which  standard 
can  be  affirmed  of  money.  In  London  gold  is  the  standard  point  from  whence 
to  measure  the  rise  and  fall  in  silver,  and  in  China  silver  is  the  standard  point 
whence  to  measure  the  rise  and  fall  in  gold.  In  that  sense  gold  is  the  standard 
in  England,  and  silver  the  standard  in  China.  There  is  in  reality  no  money 
standard  in  any  conceivable  sense  but  that  of  units  obtained  by  a  division  of 
some  commodity  or  commodities  into  units  of  equal  weight  or  measure,  and 
multiples  and  fractions  of  these.  No  wonder  that  Mr.  Bonamy  Price  is  un- 
able to  see  what  necessity  there  is  for  keeping  in  the  reserve  of  the  Bank  of 
England  more  gold  than  enough  merely  to  supply  the  calls  of  those  who  want 
to  carry  it  away  from  the  bank,  when  it  is  looked  upon  merely  as  a  commod- 
ity in  the  ordinary  sense  of  the  word.  As  an  ordinary  commodity  it  has  no 
conceivable  relation  to  what  are  called  the  credit  transactions  of  the  bank.  Its 
only  conceivable  function  in  that  character  is  to  supply  actual  calls  to  carry 
away  :  enough  for  that  purpose  is  enough  to  keep,  upon  the  commodity  theory. 


STANDARD:  DOUBLE  STANDARD. 


48T 


denominator  of  a  ratio,  a  standard.  Equally  impossible,  in  a 
practical  point  of  view,  is  fixation  of  the  proportion  between 
the  units  of  the  numerator  and  denominator  :  they  are  con- 
stantly varying.  Steadiness,  in  this  proportion,  however, 
is  the  objective  point  towards  which  all  true  currency  re- 
forms aim  ;  that  is  to  say,  steadiness  in  the  number  of  units 
of  money,  so  long  as  the  units  of  goods  sold  continue  the 
same.  Standard,  then,  for  all  practical  purposes,  as  applied 
to  one  or  the  other  metal  and  distinguished  from  weight, 
means  the  closest  possible  approximation  to  steadiness  in  the 
number  of  units  of  money,  employed  to  buy  a  definite  num- 
ber of  units  of  goods,  while  the  supply  of  the  latter  continues 
the  same. 

Now  the  closest  approximation  to  such  a  standard  lies 
in  variations  which,  while  unavoidable,  take  place  and  are 
therefore  rectified,  and  the  average  brought  up,  within  the 
shortest  periods.  This  is  precisely  the  kind  of  standard  re- 
sult brought  about  by  the  use  of  metallic  money,  —  gold,  sil- 
ver, or  both  of  them.  That  it  has  been,  that  it  can  be,  and 
in  some  countries  is  now  brought  about  by  the  use  of  metallic 
money,  while  in  other  countries,  which  have  what  may  be 
called  a  metallic  circulation,  it  is  not,  and,  under  their  mon- 
etary systems,  never  can  be  brought  about,  I  can  plainly 
demonstrate  upon  the  foregoing  general  facts,  applied  to  the 
minor  facts  in  the  respective  cases ;  but  upon  the  theory  that 
gold  coin  as  such  is  a  commodity  and  a  standard,  and  that 
Credit  pays  debts  by  set-off,  I  cannot.  The  demonstrations 
under  this  head  belong  to,  and  are  given  in  other  chapters, 
and  are  only  referred  to  here,  because  of  their  connection 
with  the  subject  of  standard.  In  respect  to  single  and  double 
standard,  there  being  no  such  thing  as  a  single,  there  cer- 
tainly can  be  no  double  standard.  But  would  not  an  annual 
supply  of  each  metal  be  more  likely  to  maintain  the  varia- 
tions in  the  ratio  of  price,  within  shorter  averages,  and  there- 
fore nearer  to  the  objective  point.  Steadiness,  than  an  annual 
supply  of  one  metal  ?  Undoubtedly  ;  and  hence  it  would 
come  nearer  to  furnishing  a  standard,  in  the  only  sense  in 
which  standard  is  possible,  than  the  product  of  a  single  metal 


488 


POLITICAL  ECONOMY. 


could. ^  There  is,  however,  an  approximation  to  the  truth, 
implied  in  the  use  of  all  such  words.  While  units  of  gold 
coin,  when  performing  their  function  of  money,  cannot  in 
true  science  be  regarded  as  a  commodity,  because  they  are 
only  units  limited  and  legalized  ;  while  Credit  can  no  more 
be  said  to  pay  debts  than  Confidence  or  Hope ;  or  gold  and 
silver  be  a  standard  than  a  unit  in  a  ratio  can  be  such,  the 
material  of  gold  coin  is  a  commodity,  units  of  bank  debt, 
founded  on  credit  and  confidence^  and  limited  by  liability 
and  convertibility  in  the  shape  of  bank-notes,  have  circu- 
lated and  do  circulate  ;  and  the  nearest  possible  approach  to 
standard  steadiness  is  furnished  by  metal,  if  circulated  in  a 
certain  way,  or  if  used  as  a  reserve,  in  a  certain  way.  The 
principle  involved  in  circulating  money  in  that  certain  way, 
is  this :  the  only  thing  which  gives  value  to  money  is  the 
thing  it  buys :  it  buys  both  commodities,  services,  and  cap- 
ital :  were  there  no  loans  of  money,  the  money,  in  every 
man's  hands,  if  he  were  not  a  thief,  would  furnish  conclusive 
evidence  that  he,  or  others  paid  by  him,  had  produced  value, 
to  the  extent  of  the  value  of  that  money  reckoned  and  deliv- 
ered in  goods,  in  exchange  for  the  money.  Under  these  con- 
ditions, prices  must  be  steady  ;  but  when,  in  the  progress  of 
civilization,  loans  take  place,  even  with  metallic  mone}^  and 
in  the  absence  of  banks,  more  or  less  unsteadiness  in  prices 
must  follow,  because  the  money  in  the  lender's  hands  is  the 
proceeds  of  goods  sold  for  consumption,  and  if  not  loaned, 

1  This  is  a  matter  for  consideration  iu  a  congress  of  commercial  nations. 
So  long  as  the  East  maintains  the  silver  standard,  gold  will  answer  all  the 
purposes  of  the  Western  nations.  The  changes  in  the  barter  rates  of  the  two 
metals,  growing  out  of  the  late  demonetizations  of  silver  in  the  West,  are  no 
indications  of  change  in  the  standard  purchasing  power  or  exchangeable  value 
of  gold  for  all  other  commodities  in  Europe  and  the  United  States,  or  of  silver 
for  all  other  commodities  in  the  East.  The  resulting  reduced  production  of 
silver  and  greater  production  of  gold ;  greater  consumption  of  silver  and  less 
of  gold  in  the  arts  and  manufactures,  and  the  comparatively  slow  movements 
of  the  two  metals  in  consequence  of  the  impossibility  of  making  sudden 
changes  in  monetary  systems,  will  maintain  the  equilibrium  in  prices,  suffi- 
ciently for  all  practical  purposes.  There  is  no  danger  of  cheap  silver  money  or 
dear  gold  money.  The  great  objection  to  silver  is  its  weight  and  bulk.  If  gen- 
erally remonetized,  governments  ought  to  store  and  keep  it  safely  for  holders, 
when  requested. 


STAm)ARD:  DOUBLE  STANDARD. 


489 


can  only  be  used  by  the  owner  to  make  purchases  for  con- 
sumption, unless  he  produces  himself ;  and  in  that  case  he 
can,  by  using  the  money,  only  produce  to  an  extent  equal  to 
the  consumption,  which  his  possession  of  the  money  demon- 
strates to  have  already  taken  place.  But  his  production, 
should  he  produce  himself,  is  thus  precisely  equal  to  that  of 
the  borrower :  in  either  case,  whether  a  borrower  takes  the 
money  and  produces,  or  whether  the  owner  of  the  money 
himself  produces,  the  production  is  in  advance  of  the  pro- 
ducer's own  wants  ;  and  he  must,  from  time  to  time,  sell  for 
cash,  and  reproduce.  If  there  are  no  banks,  and  the  money 
in  use  be  metallic,  the  lender's  money  will  so  soon  be  ex- 
hausted that  the  advance  of  production  ahead  of  consump- 
tion, through  overstock,  will  be  but  slight,  and  prices  will 
therefore  rise  but  slightly,  before  sales  restore  the  equilib- 
rium. 

Where  there  is  a  rising  scale  of  prices  there  must  necessa- 
rily succeed  a  falling  one ;  but  under  these  conditions  the  pe- 
riods are  so  short,  that  the  variation  is  but  a  short  departure 
from  steadiness :  it  approaches  steadiness  as  an  inscribed 
polygon  of  many  sides,  during  its  inscription,  approaches  the 
circle  and  at  short  intervals  touches  it.  But  why  is  metallic 
money,  in  the  absence  of  banks,  the  steadiest,  in  respect  to 
prices,  of  all  other  money  ? 

Were  production  entirely  harmonious,  as  it  certainly  would 
be  in  either  of  three  supposable  cases,  any  kind  of  money 
honestly  issued  would  give  steady  prices,  because  it  would 
he  impossible  to  put  money  in  circulation  any  faster  than  it 
would  he  retired  from  circulation.  But  production  is  not 
harmonious.  There  is  no  overstock  of  the  necessaries  of 
life,  and  there  never  can  be,  while  of  other  things  there 
may  be.  But  because  the  necessaries  of  life  cannot  be  over- 
produced, there  never  can  be,  in  the  first  place,  at  any  time, 
a  general  overstock  ;  and  in  the  second  place,  there  cannot 
be,  on  the  average,  any  partial  overstock,  because  rectification 
must  follow  by  the  partial  overstock  running  down  to  an 
understock.  The  machinery  of  social  exchanges  must  move 
in  harmony,  upon  the  average,  because,  after  the  producer  of 


490 


POLITICAL  ECONOMY. 


the  absolute  necessaries  of  life  has  sold  all  he  has  to  sell, 
should  the  producer  of  other  necessaries  be  overstocked,  the 
latter  must  stop  producing  for  the  other  to  catch  up  with 
him. 

The  three  supposable  cases  just  referred  to,  in  which 
prices  would  be  steady,  must  be  those  three  in  which  pro- 
duction would  be  steady,  and  they  are  these  :  first,  where 
there  would  be  equal  under-production  ;  secondly,  equal  over- 
production ;  and  thirdly,  no  under-production  and  no  over- 
production whatever,  but  production  everywhere  balanced, 
vrithin  equal  periods,  by  consumption.  But  temporary  over- 
production in  some  quarters  being  possible  by  means  of  loans 
of  money,  and  therefore  variation  in  prices,  —  first  up  and 
secondly  down,  —  metallic  money  without  banks  affords  the 
greatest  possible  steadiness,  or,  more  properly,  the  least  vari- 
ation from  steadiness.  Why  is  it  so  ?  My  reasons  are  pecu- 
liarly my  own,  as  are  those  I  have  given  for  the  general 
cause  of  unsteadiness ;  and  they  are  these :  The  commodity 
value  of  money  lies  wholly  in  the  goods  it  buys  ;  hence  the 
bullion  value  is  the  result  of  money  value,  and  not  the  cause 
of  money  value.  Metallic  money  in  the  hands  of  its  owners 
is,  in  the  absence  of  banks,  the  equivalent  of  so  much  pro- 
duction balanced  by  so  much  consumption,  which  is  evidence 
of  the  two  being  near  together.  The  mass  of  coin  thus 
distributed  is  so  large  in  proportion  to  the  annual  coinage, 
even  when  mining  is  most  productive,  that  the  additional 
circulation  caused  by  the  new  annual  coinage  can  never  very 
largely  exceed,  while  it  cannot  fall  much  short  of,  the  growth 
of  commerce ;  and  the  growth  of  general  and  real  commerce 
means  the  growth  not  only  of  production  and  distribution, 
but  of  consumption.  Metallic  money  has  been  the  money  of 
commerce  for  ages.  In  the  hands  of  its  holders  it  is  uni- 
versally distributed  ;  it  is  demonstration  of  so  much  com- 
merce that  has  taken  place  ;  while,  for  these  and  the  reasons 
given  before,  it  stimulates  and  at  the  same  time  keeps  pro- 
duction, for  all  practical  purposes,  harmonious. 

Hence,  and  for  these  further  reasons,  again  I  affirm,  ther^ 
is  no  such  thing  as  a  single  standard  or  a  double  standard, 


STANDARD:  DOUBLE  STANDARD. 


491 


excepting  the  unit  of  weight,  although  the  belief  seems  to  be 
universal  that  there  is.  While  Standard  as  applied  to  pur- 
chasing power,  and  predicated  of  coin  as  metal,  is,  as  I  have 
said,  born  of  Commodity,  it  is  the  father  of  Premium.  The 
premium  on  gold  coin  existing  sometimes  when  government 
or  bank-notes  are  inconvertible,  is  supposed  to  be  the  depreci- 
ation of  the  paper  below  the  standard  commodity,  gold  coin. 
But  this  premium  is  entirely  a  matter  of  accident,  greater 
under  some,  less  under  other,  and  under  some  circumstances 
nothing  at  all.  If  it  were  otherwise,  it  would  be  because 
gold  coin  in  its  character  of  commodity  would  be  possible, 
but  as  money,  impossible.  If  gold  coin  bear  a  premium  in 
inconvertible  government  or  bank-notes  of  undoubted  char- 
acter, having  the  same  power  with  it  of  paying  all  debts 
except  certain  debts  to  government,  then  a  premium  arises 
from  that  fact,  or  from  the  fact  that  coin  can  be  used  abroad, 
while  the  paper  cannot.  If  the  coin  were  a  standard,  the 
loss  of  conventional  value  in  the  notes,  in  consequence  of 
overissue  by  the  government,  largely  increased  by  the  ex- 
pansion of  circulation  through  banks,  would  be  the  exact 
measure  of  the  premium.  This  never  has  been  the  case,  be- 
cause, as  I  have  fairly  demonstrated,  the  supposed  commodity 
value  of  money  has  no  existence.  It  is  mathematically  im- 
possible, because  money  has  value  only  as  a  unit  in  the  nu- 
merator or  denominator  of  a  ratio,  and  afterwards  conven- 
tionally, in  the  equation  of  exchange.  It  is  a  commodity 
only,  when  sold  as  bullion.  If,  by  undue  expansion  of  circu- 
lation, purchasing  power  loses  fifty  per  cent,  while  premium 
rises  only  to  ten  per  cent.,  gold  coin  has  lost  in  general  pur- 
chasing power  fifty  per  cent,  with  all  other  money,  and  has, 
as  money  for  special  purposes  at  home,  or  to  send  abroad  as 
money  or  commodity,  or  to  sell  at  home  to  be  manufactured 
as  commodity,  risen  only  to  ten  per  cent,  premium. 

The  remaining  question,  then,  is  as  to  metallic  supply ; 
and  this  is  a  question  of  considerable  importance.  Germany 
and  the  Latin  Union  have  demonetized  silver.  What  is  de- 
monetization ?  Gold  and  silver,  by  units  of  weight,  weighed 
by  seller  and  buyer  at  each  purchase,  as  happens  at  times  in 


492 


POLITICAL  ECONOMY. 


mining  districts,  assayed  by  governments  or  individuals,  or 
assayed  and  coined  by  governments  or  individuals,  have  for 
ages  been  the  money  of  the  commercial  world.  The  rela- 
tions of  weight  in  the  units  have  been  already  stated  with 
rigorous  exactness.  If  15^  and  1  were  the  proper  ratio,  as  it 
probably  would  be  very  nearly  were  Germany  and  the  Latin 
Union  to  remonetize  silver,  then  there  must  have  been  ap- 
proximately fifteen  and  a  half  pounds  of  silver  in  coin  for 
every  pound  of  gold  in  coin  ;  and  this  ratio  has  been  main- 
tained for  a  considerable  period,  notwithstanding  great  vari- 
ations in  the  production  of  each  metal.  Hence  it  follows 
that  there  are,  and  for  some  time  have  been,  approximately 
equal  amounts  of  silver  and  gold  in  coin,  in  point  of  value, 
throughout  the  commercial  world.  It  further  follows  that 
approximately  equal  amounts,  in  point  of  value,  are  now  ex- 
isting in  a  manufactured  state.  If  we  take  the  ratio  of  45  to 
1  as  the  probable  average  production  of  silver  compared 
with  gold,  then  there  must  be  approximately  fifty  per  cent, 
of  the  value  of  all  the  gold  coin  now  existing,  in  the  shape 
of  manufactured  gold,  and  a  like  proportion  of  silver.  There 
is  suificient  approximation  to  the  truth  here,  or  upon  the 
average  of  this  and  all  other  estimates,  to  show  that  there 
is  a  very  nearly  equal  amount  in  value  of  the  two  metals  in 
the  arts,  and  at  the  same  time  a  very  nearly  equal  amount 
in  money.  The  demonetizations  referred  to  will  diminish 
the  coinage  and  somewhat  the  production  of  silver,  and  in 
a  like  proportion  increase  its  manufacture  for  purposes  other 
than  money,  while  as  a  necessary  consequence  the  manu- 
facture of  gold  for  purposes  other  than  money  will  decrease, 
and  for  the  purposes  of  money  increase.  This  is  one  of  the 
great  benefits  resulting  from  the  use  of  such  metals  as  silver 
and  gold,  possessed  of  such  a  kind  of  utility  as  commodities, 
that  while  they  are  not  indispensible,  arts  and  manufactures 
will  take  all  that  can  be  shared,  subject  to  the  condition  of 
keeping  the  bullion  ratio  steady.  The  cheapening  of  gold, 
—  that  is  to  say,  its  loss,  or  its  tendency  to  loss,  of  con- 
ventional value  in  exchange,  —  by  its  vastly  increased  pro- 
duction, through  the  discovery  of  the  gold-bearing  lands  of 


STANDARD:  DOUBLE  STANDARD. 


493 


California  and  Australia,  caused  a  corresponding  increase  of 
manufacture  for  purposes  other  than  money,  and  a  decrease 
for  a  time  in  that  of  silver.  The  demonetizations  of  silver 
will  be  largely  compensated  in  this  way.  In  the  next  place, 
as  the  disuse  of  silver  coin  progresses,  the  use  of  gold  coin, 
which  has  been  used  less  before,  because  there  was  more  sil- 
ver, will  be  used  more  hereafter,  for  want  of  silver.  In  the 
third  place,  the  silver  of  Germany  and  the  Latin  Union  will 
continue  to  circulate  at  par,  notwithstanding  its  loss  of 
fifteen  per  cent,  in  bullion  value,  until  gradually  replaced  by 
gold.  In  fact,  there  is  nothing  in  the  way  of  its  always  cir- 
culating, and  being  in  fact  somewhat  increased,  as  before 
shown  in  the  supposed  case  of  gold,  should  actual  or  imag- 
inary scarcity  of  gold  render  it  desirable.  If  the  danger 
from  counterfeiting  turns  out  to  be  much  less  than  expected, 
the  use  of  the  present  silver  can  be  continued  indefinitely, 
and  the  demand  for  gold  for  coinage  will  be  to  supply  only 
the  future  increase  of  coin  demanded  by  the  ratio  of  increas- 
ing commerce.  That  increase  bids  fair  to  be  supplied  by 
the  increase  of  banks  in  Germany  ;  and  this  "  economy " 
of  coin  through  banks  is  a  potent  cause  which  will  help  to 
counteract  an  advance  in  the  purchasing  power  of  gold. 
This  cause  is  the  most  potent  of  all.  Were  silver  and  gold 
generally  and  equally  monetized  throughout  the  commercial 
world,  one  half  of  the  value  of  each  in  coin  would  be  kept 
in  manufactured  commodities,  as  the  result  of  maintaining  an 
equal  distribution  of  conventional  value.  Bullion  value  is  an 
effect,  and  not  a  cause.  It  can  never  exceed  conventional 
value,  and  within  the  limits  particularly  mentioned  in  this 
chapter  it  will  fall  below  it ;  an  instance  of  which  now  appears 
in  the  case  of  Germany  and  the  Latin  Union.  The  bullion  of 
their  total  silver  and  gold  in  the  shape  of  and  as  coin  is  worth, 
in  general  conventional  value  in  exchange,  by  equal  weights, 
in  the  ratio  of  2  for  silver  to  31  for  gold,  but  as  bullion,  silver 
is  worth  fifteen  per  cent.  less.  It  is  open  to  all  communities, 
through  government  action,  to  adopt  the  same  course,  and 
coin  and  issue  silver  at  the  old  ratio.  It  will  circulate  at  the 
old  ratio  as  long  as  its  total  falls  considerably  short  of  the 


494 


POLITICAL  ECONOMY. 


total  metallic  supply  the  country  requires,  gold  necessarily 
remaining  to  supply  the  deficiency,  and  maintaining  all  the 
metallic  units  in  circulation ;  the  gold  performing  all  the 
exchanges  in  international  markets.  There  is  no  difficulty 
in  using  silver  in  this  way  in  home  commerce.  The  real 
question  is,  whether  it  would  be  convenient  or  desirable  to 
so  use  it.  No  other  government  but  the  United  States  would 
be  likely  to  attempt  it.  If  France  had  as  little  silver  as  the 
United  States,  she  would  never  be  guilty  of  the  folly  of 
loading  herself  with  it  until  other  nations  were  ready  to 
share  the  load  with  her. 

The  great  difficulty  to  be  encountered,  first  of  all,  by  any- 
one who  attempts  to  discuss  the  subject  of  free  coinage  of  sil- 
ver, or,  what  is  the  same  thing,  free  purchase  by  government 
of  all  silver  offered,  and  coinage  and  issue  on  government  ac- 
count, is  to  have  a  fair  hearing  from  those  who  have  made  it 
a  party  question.  It  is  the  same  with  a  "  tariff  for  protec- 
tion." The  views  of  all  extremists  are,  for  the  most  part, 
wrong,  considered  by  themselves  ;  and  the  reason  why,  on  the 
whole,  a  correct  line  of  action  is  sometimes  developed  prac- 
tically from  such  views,  either  socially  or  politically,  is  the 
fact,  that  the  resulting  line  of  action  is  the  medium  line  be- 
tween the  extremes,  where,  approximately,  the  truth  lies  ; 
which  is  followed,  not  as  the  rule  of  reason,  discovered  by 
reason,  but  the  line  of  approximate  truth,  resulting  from  the 
mutual  action  and  reaction  of  oppositely  erroneous  opinions. 

It  is  supposed  by  the  party  who  oppose  the  free  coinage, 
or  free  purchase  and  coinage  of  silver  by  the  government, 
that  it  will  make  "  cheap  "  money,  because  silver  bullion  is 
worth  so  much  less  than  it  was.  They  think  that  the  pres- 
ent loss  in  barter  rates  between  silver  and  gold,  on  the  part 
of  silver,  will  make  the  silver  worth  less  than  gold  by  some- 
thing like  the  apparent  present  decrease  in  its  barter  rate  as 
bullion,  when  it  comes  to  be  used  as  money.  Again,  some 
think  that  the  owners  of  stock  in  silver  mines  will  profit 
largely  and  unjustly  by  free  coinage.  These  are  some  of  the 
errors  on  one  side.  The  owners  of  stock  in  mines  lost  by  the 
European  suspensions  of  free  coinage  ;  that  they  might  gain 


STANDARD:  DOUBLE  STANDARD. 


495 


by  free  coinage,  on  the  part  of  the  United  States,  is  a  circum- 
stance for  which  they  are  no  more  blamable  than  the  govern- 
ments who  caused  their  loss  by  the  suspensions  of  free  coin- 
age. As  to  cheapness,  it  would  undoubtedly  be  the  dearest 
undertaking,  in  the  way  of  coinage,  the  government  could 
embark  in.  Silver  would  at  once  rise,  and  continue  to  rise 
as  soon  as  the  law  establishing  free  coinage  or  free  purchase 
and  coinage  had  passed.  It  is  doubtful,  moreover,  whether 
free  coinage  at  the  ratio  of  16  to  1,  even  admitting  the  im- 
mediate result  of  such  a  coinage  to  be  a  rise  of  barter  rates 
on  the  part  of  silver  in  London  from  17^  or  17|  to  16^,  thus 
leaving  the  barter  rate  of  the  United  States  short  of  the 
commercial  world's  rate  by  only  one  half  pound  to  every 
sixteen,  or  say  three  per  cent.,  or  a  coinage  at  any  other 
ratio,  would  furnish  silver  enough  before  convertibility  is 
reached,  to  take  the  place  of  the  departing  gold.  Free  coin- 
age might  come  to  an  end  before  that  event,  by  the  act  of  the 
owners  of  silver  bullion.  The  gold  coin  of  the  United  States 
will  not  be  purchased  at  a  premium  to  remit  abroad,  and  will 
only  leave  after  convertibility  is  reached.  As  to  what  is 
called  contraction  and  expansion,  in  the  popular  sense,  there 
would  be,  after  convertibility  is  reached,  and  after  the  silver 
required  had  been  all  coined,  perhaps,  three  per  cent,  more 
of  silver,  in  the  shape  of  coined  dollars,  multiples  of  dollars, 
and  fractions  of  dollars,  than  there  could  have  been  of  gold 
in  the  shape  of  dollars  and  multiples  and  fractions  of  dollars, 
at  the  same  period,  if  the  free  coinage  of  silver  had  not  been 
established,  and  further,  if  no  treasury  notes  were  left  out- 
standing in  either  case ;  but  the  existence  of  any  excess  is 
doubtful.  This  would  be  the  natural  result  of  the  causes 
which  would  carry  up  and  maintain  the  commercial  world's 
barter  rates  in  London  at  sixteen  and  a  half  pounds  of  sil- 
ver for  one  of  gold.^    The  permanent  establishment  of  the 

1  Silver  has  fallen  in  London  relative  to  gold,  in  consequence  of  the  late  de- 
monetizations, say  some  of  the  London  financial  authorities,  since  the  report  of 
the  commission  on  East  Indian  prices  before  and  since  the  falling  off  of  sil- 
ver in  barter  rates  with  gold.  That  is  undoubtedly  true  in  the  London  market ; 
but  suppose  the  Latin  Union  alone  to  have  stopped  free  coinage  of  silver,  and 
Germany  retaining  silver  as  her  standard,  to  have  continued  it.    Silver  bull- 


496 


POLITICAL  ECONOMY. 


barter  rate,  at  the  latter  figures,  would  be  a  demonstration  in 
figures,  that  after  supplying  all  the  additional  demands  for 
silver  to  be  used  in  arts  and  manufactures,  in  consequence 
of  the  cheapening  of  its  barter  rate  compared  with  gold 
through  the  action  of  Germany  and  the  Latin  Union,  and  the 
demand  of  the  United  States  for  purposes  of  coinage,  three 
per  cent,  more  silver  dollars  of  the  United  States,  after  a 
considerable  period,  might  possibly  be  in  existence,  than 
there  would  have  been  of  gold  dollars  of  the  United  States, 
including  all  multiples  and  fractions,  had  the  United  States 
refrained  from  the  free  coinage  of  silver  without  keeping 
in  circulation  any  treasury  notes  in  either  case. 

But  if  the  United  States,  in  case  of  such  free  coinage  of 
silver,  refuse,  through  Congress,  to  allow  any  treasury  notes 
to  remain  outstanding  after  convertibility,  —  retaining  and 
retiring  all  as  they  come  in,  if  able  to  do  so,  while,  on  the  other 
hand,  refusing  to  coin  silver  freely,  they  would  supplement 
gold  by  an  issue  of  one  hundred  millions  of  treasury  notes,  to 
remain  in  circulation  for  a  long,  perhaps  an  indefinite,  pe- 
riod, there  would  be  a  much  smaller  number  of  silver  dollars 
and  their  multiples  and  fractions  in  the  first  case  supposed, 
than  of  gold  dollars  and  their  multiples  and  treasury  notes, 

ion  would  have  fallen  in  London,  relative  to  gold,  but  in  Berlin  and  other  parts 
of  the  German  Empire,  gold  would  have  risen  relatively  to  silver.  But  it  is  im- 
possible for  both  these  propositions  to  be  true,  unless  gold  has  risen  as  much 
as  silver  has  fallen ;  which  is  undoubtedly  the  case,  although,  in  the  language 
of  the  London  bullion  market,  silver  has  fallen  while  gold  has  remained  sta- 
tionary. Here  we  have  incidentally  a  practical  demonstration  of  the  a  priori 
demonstration  given  in  Chapter  I.  and  elsewhere,  that  purchasing  power  can 
neither  be  increased  nor  diminished  in  the  abstract,  and  that  a  loss  of  it  by 
partial  demonetization  in  one  metal  is  equaled  by  the  gain  in  the  other.  The 
exchangeable  value  of  a  unit  dollar  in  gold,  for  commodities,  determines  the 
commodity  value  of  its  bullion,  compared  with  other  commodities;  and  for 
reasons  already  given,  a  paper  unit  may  do  the  same.  In  this  way  bullion 
values  were  cheapened  relatively  to  all  other  commodities  by  our  present  incon- 
vertible currency.  If  the  gold  unit  had  been,  as  such,  a  commodity,  this  would 
have  been  impossible.  Barter  rates  between  metals  in  London,  do  not  indicate 
at  this  time  that  there  has  been  any  change  effected  as  yet  in  the  relative  pur- 
chasing power  of  silver  where  silver  is  still  used,  nor  of  gold,  where  gold  is  still 
used.  An  inquiry  whether  gold  had  risen  in  purchasing  power  in  England, 
would  have  been  as  much  to  the  real  ]X)int,  as  an  inquiry  by  commission,  about 
prices  in  the  East  Indies. 


STANDARD:  DOUBLE  STANDARD. 


497 


their  equivalents,  dollar  for  dollar,  in  tlie  second  case.  There 
is  probably  now  existing  in  coin  a  sum  of  gold  dollars  and' 
their  multiples  sufficient  to  resume  "  specie  payments  "  if 
there  could  be  an  adequate  retirement  of  treasury  notes  and 
bank-notes.  What  is  wanting,  is  some  additional  coinage  of 
gold,  perhaps;  but  the  great  want  and  the  great  need  is  a 
contraction  of  the  volume  of  treasury  and  bank-notes  to  a 
sufficient  extent,  and  gold  enough  in  the  banks,  in  the  treas- 
ury, and  in  the  country  at  large,  to  maintain  the  convertibil- 
ity of  say  one  hundred  millions  of  treasury  notes  and  two 
hundred  and  seventy-five  to  three  hundred  millions  of  bank- 
notes. Silver  cannot  be  coined  fast  enough  ;  and  if  it  could, 
its  barter  rate  with  gold  would  probably  be  carried  too  high 
or  too  low  in  the  ratios  established  for  the  mint.  At  16  and 
1,  it  would  probably  be  too  high.  Too  low  a  ratio  would 
send  it  all  away ;  too  high  a  ratio  would  send  all  the  gold 
away,  and  leave  a  barter  rate  of  exchange  against  silver,  to 
be  settled  by  allowing  a  premium  ranging  from  one  to  three 
per  cent,  to  bills  of  exchange  on  outgoing  merchandise,  to  be 
paid  in  the  end  equally  by  all  merchandise  and  so  by  all 
commerce,  internal  as  well  as  external.  There  could  be  no 
national  loss  on  this,  because  it  is  a  mere  arbitrary  rate,  hav- 
ing no  reference  to  home  prices,  but  arbitrarily  allowed  to 
outgoing  merchandise,  which  is  the  foundation  of  bills  of  ex- 
change, in  order  to  settle  the  barter  difference  of  exchange 
of  the  two  metals  as  established  in  the  United  States  where 
the  outgoing  merchandise  is  shipped,  and  the  barter  rates  ex- 
isting in  the  ports  to  which  the  outgoing  merchandise  is  sent. 
But  should  it  become  necessary,  as  it  sometimes  would,  for 
the  United  States  to  remit  metal  abroad  to  pay  its  naval, 
consular,  diplomatic  and  other  expenses,  or  should  it  become 
necessary  for  merchants  to  ship  silver,  there  would  be  an  ar- 
bitrary though  real  difference  to  be  settled,  for  which  there 
will  be  no  compensation  in  point  of  real  values.  It  would 
create  so  far  a  real  charge,  to  be  paid  without  compensation 
by  the  people  of  the  United  States  in  the  case  last  supposed. 
France  has  trouble  enough  with  her  silver  ;  but  she  will  main- 
tain its  purchasing  power  by  keeping  its  whole  volume  in 

32 


498 


POLITICAL  ECONOMY. 


units  much  less  than  the  total  of  metallic  units  of  gold  and 
silver  in  francs,  which  her  needs  require.  But  after  converti- 
bility is  restored,  she  would  not  be  able  to  maintain  as  large 
an  issue  of  bank-notes  as  she  could  do  if  her  silver  could 
be  partly  unloaded  upon  some  nation  which  might,  single- 
handed,  undertake  the  task  of  giving  free  coinage  to  silver. 
So  far  from  banks  being  likely  to  suffer  injury  from  the  free 
coinage  of  silver,  it  would  be  a  benefit  to  them,  in  the  way  of 
redemptions,  if  they  keep  their  own  redemption  reserve  for 
bank-notes.  It  is  international  commerce  which  will  be  need- 
lessly embarrassed  :  it  is  home  commerce  which  will  be  loaded 
down  with  the  weight  of  silver :  it  is  the  people  at  large,  and 
not  bankers  alone  who  ought  to  object. 

To  sum  up  all  that  can  be  said  upon  the  subject  of  stand- 
ard and  double  standard,  metallic  money  is  no  measure  of 
the  depreciation  of  paper  money,  nor  is  the  latter  a  measure 
of  the  depreciation  of  the  former.  In  this  sense,  standard  is 
imaginary.  There  is  some  foundation  for  the  prevailing 
opinion  that  metallic  money  is  such  a  standard,  however,  as 
there  is  for  the  opinion  that  while  still  money,  its  metallic 
material  makes  it  a  commodity  equally  with  bullion,  and 
that  equations  of  exchange,  effected  by  loans  and  checks,  are 
mere  set-offs.  There  is  a  limit  to  the  manufacture  of  me- 
tallic units  in  the  material  of  which  they  are  made ;  and  in 
view  of  their  immense  accumulation,  general  distribution 
and  steady  ratio  of  increment,  they  furnish  the  nearest  ap- 
proach to  invariability  of  purchasing  power  which  is  possi- 
ble or  conceivable.  Paper  money  has  no  such  limitation, 
and  hence  the  necessity  of  limiting  its  units,  whenever  em- 
ployed in  equations  of  exchange  between  buyer  and  seller, 
by  metallic  units  thus  distributed.  To  give  paper  units 
and  gold  and  silver  units  taken  together,  the  same  steadi- 
ness of  purchasing  power  with  metallic  units,  when  circulat- 
ing alone,  there  must  be  some  definite  proportion  established 
between  the  two,  unless  the  units  of  paper,  as  compared  with 
those  of  metal,  form  so  small  a  part  of  the  whole  currency  as 
to  avoid  all  danger  of  excess.  To  ijfie  truth  of  this  excep- 
tion, witness  the  volume  of  bank-notes  in  France,  and  bank- 


STANDARD:  DOUBLE  STANDARD. 


499 


notes  issued  upon  government  debt  in  England.  The  only 
test  of  the  maintenance  of  a  steady  proportion  between  paper 
and  metallic  units  is  the  maintenance  of  a  steady  propor- 
tion between  the  totals  of  bank  debt,  whether  in  the  form 
of  circulating  notes  or  deposits  and  metallic  reserve.  The 
office  of  gold  and  silver  is  thus,  while  constituting  a  part  of 
the  whole  circulation,  to  limit  the  remainder  in  the  form  of 
circulating  notes,  and  to  limit  also  the  economy  of  metal,  — 
the  economy  of  metal  being  the  difference  between  the  metal 
in  the  reserve  and  deposit  debt  due  from  banks,  minus  that 
metal.  For  this  purpose  all  banks  are  to  be  regarded  as  one. 
The  right  to  issue  notes  and  the  right  to  economize  metal 
and  notes  in  banking  reserve,  are  substantially  one  and  the 
same  thing.  A  bank  of  deposit-loan  economizes  metal  or 
metal  and  notes :  its  debt  over  and  above  reserve  is  the  meas- 
ure of  that  economy,  and  takes  the  place  of  a  like  amount  of 
metal,  or  metal  and  notes.  Every  payment  is  made  out  of 
units  in  its  reserve.  If  it  were  not  so,  a  very  small  sum 
would  answer  for  reserve.  Either  units  of  bank  debt  or  units 
in  the  reserve  are  transferred  by  check  in  the  equations  of 
exchange,  the  money  side  of  which  is  not  originated  in  bank, 
as  generally  supposed,  but  only  registered  there.  If  units 
of  debt  and  not  units  in  the  reserve  are  carried  into  the 
equations,  then  all  banks  are  banks  of  issue.  The  loans  in 
that  case  constitute  the  issue,  and  the  units  of  money  limited 
by  the  terms  of  the  loans  are  transferred  in  the  equations  of 
exchange  by  check.  A  duly  proportioned  reserve  is  there- 
fore as  necessary  against  deposit  debt  as  against  debt  by 
bank-notes  actually  delivered  over  bank  counters. 

Standard,  as  metallic  commodity,  has  no  existence.  There 
is  a  standard  necessity,  however,  for  dividing  metallic  com- 
modity into  units  of  metal  by  weight,  before  using  it  as 
money.  Value,  aside  from  actual  use,  as  applied  to  metallic 
or  any  other  money,  is  an  abstraction.  One  thousand  mill- 
ions of  units  will  value  as  much  as  five  thousand  millions. 
To  add  a  unit,  or  to  take  one  away,  makes  no  difference 
with  a  series  of  units  having  no  relation  to  any  other  units. 
The  relations  of  gold  and  silver  must  therefore  be  by  weight, 


500 


POLITICAL  ECONOMY. 


excluding  all  intrinsic  qualities.  More  than  fifteen  times  as 
many  units  by  weight  can  be  made  out  of  the  silver  left  after 
the  commodity  demand  is  satisfied,  as  can  be  made  out  of  the 
gold  left,  after  satisfying  the  same  demand.  Hence,  if  gold 
and  silver  were  equally  money,  and  the  only  money,  without 
the  practice  of  economy  of  metal  anj^where,  the  tendency 
would  be  to  coin  an  equal  number  of  units  of  each  kind, 
and  purchasing  power  would  be  equally  divided  between 
them,  because  each  would  have  an  equal  number  of  units. 
It  would  be  then  as  it  is  now,  —  absolutely  impossible  to  get 
rid  of  the  superfluous  weight  of  silver,  because,  by  doing  so, 
the  number  of  units  would  be  made  to  vary,  and  number, 
although  absolutely  unimportant,  is  relatively  important. 
Abstracted  from  commerce,  then,  money  is  but  a  series  of 
units  having  no  value,  because  no  relation  to  any  other  units. 
It  is  immaterial,  therefore,  what  the  units  are  made  of  and 
what  is  their  number,  outside  of  the  commerce  of  actual  ex- 
changes. When  applied  to  the  purpose  of  those  exchanges, 
limitation,  or,  in  other  words,  steadiness,  becomes  essential; 
and  here  we  have  mathematical  demonstration  of  the  fact 
universally  admitted,  that  units  of  metal  are  the  steadiest  of 
all  measures  of  value.  We  have,  at  the  same  time,  like  dem- 
onstration of  the  total  absence  of  any  such  thing  as  intrinsic 
or  even  extrinsic  value  in  money,  save  as  a  substituted  mem- 
ber in  the  equations  of  exchange.  Money,  when  actually  used, 
becomes  in  this  manner  a  series  of  units  which  value  the 
merchandise  bought,  and,  at  the  same  time,  localized  in 
some  form,  are  made  its  equivalent.  The  theory  of  mercan- 
tile value  in  money,  however  useful  in  its  place,  is  in  true 
science  false,  and  must  be  discarded  in  the  management  of 
banking  reserve.  The  manufacture  of  the  metallic  unit  is 
a  question  of  numbers  only,  considered  absolutely;  and  ab- 
stracted from  any  conventional  relation  to  commerce,  the 
unit  as  money,  has  no  value.  One  series  of  units  of  a  given 
weight  is  equal  in  abstract  value  to  another  series  of  a  dif- 
ferent weight,  because  one  is  equal  to  the  other  in  the  ab- 
stract equation  of  exchange,  and  the  difference  in  the  num- 
ber of  units  which  can  be  made  out  of  the  metallic  material, 


STANDARD:  DOUBLE  STANDARD. 


501 


as  one  after  anotlier  unit  of  weight  is  assumed,  can  be  stated 
with  mathematical  exactness. 

But  when  one  or  more  of  the  localized  and  limited  units 
are  placed  in  some  one  of  the  millions  of  the  greater  or 
smaller  equations  of  exchange  which  are  continually  being 
made  and  perfected  by  mutual  deliveries,  variation  is  una- 
voidable. If  to-day  one  of  the  equations  is  100  dollars  = 
100  bushels  of  wheat,  the  quantity  of  wheat  on  the  one  hand 
or  money  on  the  other  may  be  indefinitely  increased  or  di- 
minished by  to-morrow.  It  may  be  100  -f-  or  —  x  dollars, 
wheat  remaining  the  same,  or  100  -f-  —  ^  bushels  of 
wheat,  dollars  remaining  the  same,  to-morrow.  The  wheat 
must  vary  annually ;  the  dollars  ought  not  to  vary  except 
with  the  units  of  all  commodities,  to  exchange  which  for  the 
wheat  and  other  necessaries  is  the  most  important  function 
of  money.  The  units  of  metallic  money  scattered  by  com- 
merce and  not  consolidated  out  of  numerous  individual  re- 
serves into  one  or  more,  so  as  to  permit  loans  without  any 
limit  but  a  banking  crisis,  to  be  made  from  the  supplying 
current  of  units  through  deposits,  furnish  equations  of  ex- 
change with  the  least  possible  variation  in  the  unknown 
quantity  on  whichsoever  side  of  any  given  equation  it  may 
be  found.  A  currency  like  that  of  France,  for  the  most 
part,  avoids  all  loans  out  of  the  supplying  current  of  deposits, 
which  go  to  increase  production,  and  with  it  that  extra  cir- 
culation of  money,  which  first  expands  and  afterwards  con- 
tracts the  variable  quantity  x^  in  harmony  with  production 
and  not  with  commerce.  The  quantity  of  metal  in  the  unit 
is  material  only  as  it  limits  the  whole  number  of  units  that 
can  be  made :  the  name  of  the  unit  has  no  other  relation  to 
the  quantity.  In  no  other  manner  than  this  can  it  be  demon- 
strated that  the  popular  idea  of  metallic  money  as  possessing 
the  highest  attainable  degree  of  stability  of  exchangeable 
value,  in  all  equations  of  exchange,  is  true.  That  metallic 
money,  like  all  other  money,  is  but  a  series  of  units,  is  proved 
by  the  fact  that  as  units  in  the  equations  of  exchange,  neither 
metal  has  gained  or  lost ;  while  as  metallic  materials,  they 
have  changed  their  relations  of  value  reckoned  in  each  other 


POLITICAL  ECONOMY. 


fifteen  per  cent.  Were  they  changed  fifty  per  cent.,  the 
principle  would  still  be  maintained.  Banks  do  not  make 
the  equations;  they  are  made  by  buyers  and  sellers,  and 
banks  register  the  changes  in  the  ownership  of  the  units  on 
the  money  side.  As  a  result^  but  not  a  moving  cause,  bank- 
notes are  returned  to  the  issuing  banks  and  bank  debt  is 
canceled.  This  is  no  part  of  the  equations,  but  the  result 
of  making  them.  To  assert  otherwise  is  to  assert  that 
banks  are  buyers  and  sellers.  They  register  the  transfers 
of  the  units  of  money  which  constitute  one  side  of  the  equa- 
tions :  they  do  not  make  the  equations.  Contraction  of  loans 
leads  to  contraction  of  circulation,  and  this  to  contraction  of 
the  variable  quantity  cc,  on  the  money  side,  because  produc- 
tion has  reached  its  limits,  and  labor  has  less  money.  Con- 
traction of  the  variable  quantity  on  the  money  side,  always 
begins  to  take  place  before  an  industrial  crisis. 

In  no  other  sense  than  that  stated  in  this  chapter  is  stand- 
ard or  double  standard  possible  or  conceivable.  Standard 
metallic  commodity,  measuring  as  metallic  money,  the  de- 
preciation of  paper  money  when  compared  with  itself  must 
have  arisen  from  confounding  purchasing  power  in  the  ab- 
stract with  purchasing  power  in  fact.  These  are  two  very 
different  things.  Divide  the  mass  of  each  metal  into  as  many 
or  as  few  units  as  you  choose :  conceive  of  each  mass  as  one 
unit  at  first,  and  afterwards  divided  and  subdivided  into 
ten  thousand  million  pieces,  called  dollars,  and  the  purchas- 
ing power  of  each  series,  beginning  at  first  with  two  only, 
is  the  same ;  but  a  vast  number  of  accidents  and  incidents 
occur  to  vary  their  purchasing  power  when  actually  ex- 
changed for  commodities.  Metallic  money  must  therefore 
be  regarded  from  different  points  of  view.  The  develop- 
ment of  exchange  of  any  kind,  as  the  condition  precedent  to 
society,  shows  that  money  is  in  its  origin  a  mode  of  valua- 
tion by  units,  each  commodity  furnishing  units  for  the  other, 
the  whole  number  of  units  being  limited  by  the  commodities 
exchanged.  Tlie  next  advance  is  to  limit  the  units  by  one  or 
more  commodities  only,  and  to  make  the  units  thus  localized 
and  limited,  not  only  measuring  units  of  value,  but  conven- 


STANDARD:  DOUBLE  STANDARD. 


603 


tional  equivalents  in  all  equations  of  exchange.  The  first 
equation  of  exchange  was  x  horses  =  12  cows,  or  12  horses 
=  X  cows.  The  determination  of  the  unknown  quantity  x 
being  settled  by  mutual  agreement,  mutual  deliveries  fol- 
lowed. The  introduction  of  money  converted  the  equation  . 
into  12  cows  =  x  dollars,  or  12  horses  =  x  dollars.  In  prin- 
ciple the  exchange  remains  the  same  as  at  the  first  stage 
of  development.  At  the  first  stage  the  commodities  were 
brought  together;  at  the  second  stage  this  was  rendered 
unnecessary  ;  but  the  principle  upon  which  the  valuation  was 
made  continued  the  same  because  it  was  absolutely  impossi- 
ble for  it  to  be  different.  Commodities  were  at  first  esti- 
mated in  the  equation  of  exchange  relative  to  each  other,  by 
units :  they  have  ever  since  continued  to  be  so  valued,  not- 
withstanding the  invention  of  money.  The  introduction  of 
money  made  the  valuation  as  well  as  the  exchange,  easier, 
but  introduced  the  danger  of  excess,  defect  and  variation  in 
the  number  of  valuing  units.  This  danger  has  been  met 
and  obviated  by  the  use  of  gold  and  silver,  scattered  every- 
where by  commerce,  as  in  France.  The  danger  has  been  re- 
produced and  followed  by  disastrous  effects  through  "  econ- 
omy "  of  metal,  out  of  which  the  units  are  made,  in  nearly 
all  countries,  but  preeminently  in  Great  Britain  and  the 
nations  and  colonies  allied  to  her. 

The  valuation  and  exchange  of  commodities,  under  all  cir- 
cumstances, however  complex,  still  continue  the  same,  and 
the  problem  is,  how  to  limit  economy  of  metal  and  paper 
money  by  units  of  metal  scattered  by  commerce,  as  of  yore, 
and  even  now  in  France.  Commodities  are  still  valued  rela- 
tively to  each  other  by  units  :  the  difference  between  barter 
exchange  and  money  exchange  in  principle,  —  to  say  nothing 
of  the  absolute  necessity  of  money  to  commerce  and  civiliza- 
tion, —  is  that  commodities  need  not  be  brought  together, 
where  money  is  in  use,  and  when  money  has  been  received 
by  a  seller,  he  may  locate  his  power  of  exchanging  upon  any 
commodity  he  chooses.  The  development  of  units  limited  by 
commodities  exchanged  into  a  series  of  units  localized  in  one 
or  more  commodities,  is  shown  in  the  first  chapter,  which 


504 


POLITICAL  ECONOMY. 


treats  of  the  development  of  money  and  its  uses.  The  mode 
of  valuation  is  by  ratio  or  proportion,  and  therefore  by  units. 
The  units  of  commodities  reckoned  in  money  give  price,  and 
the  units  of  money  reckoned  in  commodities  give  purchasing 
power.  Money  must  be  used  by  every  one  who  buys  or  sells 
labor  or  commodities.  The  mischief  which  lies  at  the  very 
threshold  of  money,  after  the  increase  of  production,  through 
increase  of  loans,  by  bank  agency,  intervenes,  is,  that  the  ap- 
parent rise  in  value,  through  rise  in  price  (which,  if  it  occurs 
at  all,  is  for  the  most  part  real  when  metallic  money,  scattered 
by  commerce,  as  in  France,  is  alone  paid  out  and  the  only 
money  loaned),  is  still  supposed,  notwithstanding  the  differ- 
ence in  conditions,  to  be  equally  real,  although  such  condi- 
tions naturally  and  necessarily  give  only  a  nominally  rising 
scale  of  prices  through  artificially  increased  production,  fol- 
lowing artificially  increased  loans.  This  turns  production 
and  commerce  more  or  less  into  games  of  chance,  and  here 
lies  the  foundation  of  what  most  writers  call  speculation, 
which  is  a  word  without  any  definite  meaning.  But  devel- 
opment aside,  there  is  a  mathematical  impossibility  of  any 
other  mode  of  valuation  but  that  of  units  of  goods  and  units 
of  money,  buyers  and  sellers  establishing  the  relations  be- 
tween the  units  of  each  kind,  and  thus  obtaining  the  elements 
of  the  equation  of  exchange  which  naturally  follows.  We 
have  practical  demonstration  of  the  same  law  in  the  fall  of 
silver  bullion  reckoned  in  gold  bullion,  fifteen  per  cent.,  while 
the  purchasing  power  of  the  units  of  each  metal  remains  the 
same.  Had  the  fall  of  silver  bullion  been  fifty  per  cent.,  pur- 
chasing power  would  have  remained  equally  unaffected.  The 
barter  relations  between  the  metallic  materials  of  the  units 
settle  themselves  with  almost  mathematical  exactness,  because 
there  are  no  complex  elements  to  be  calculated  between  the 
units  of  valuation  before  the  equation  of  exchange  between 
them  is  perfected.  The  owners  of  cattle  and  horses,  in  coun- 
tries occupied  by  roving  tribes,  whose  property  lies  chiefly  in 
flocks  and  herds,  have  complex  elements  to  calculate  before 
settling  the  terms  of  the  equation ;  but  the  owners  of  gold 
and  silver  bulhon  have  only  the  simple  one  of  weight,  which 


STANDARD:  DOUBLE  STANDARD. 


505 


is  estimated  without  difficulty.  Herein  lies  the  true  objec- 
tion to  the  free  coinage  of  silver  by  any  nation,  which  is  not 
already  burdened  with  it,  until  monetary  science  has  ad- 
vanced sufficiently  to  make  it  appear  that  all  nations  are 
bound  to  act  together  in  a  matter  of  common  interest,  when 
neglect  to  do  so  entails  loss  and  injury. 

It  is  the  unit  character  of  all  money,  the  impossibility  of 
employing  it  in  any  other  manner,  and  the  mathematical 
certainty  of  making  a  profit  by  the  exchange,  by  selling  coin 
as  bullion  without  investing  a  dolhir  in  merchandise,  which 
would  make  it  a  matter  of  profit  to  buy  and  sell  gold  as 
bullion,  should  any  great  nation,  now  without  silver,  coin  it 
freely  at  such  a  ratio  to  gold  as  would  fall  short  from  one  to 
three  per  cent,  of  the  general  barter  rate  of  the  world.  There 
would  be  a  moral  certainty  of  its  losing  all  its  gold,  as  the 
United  States,  some  years  since,  lost  all  their  silver.  If  the 
true  nature  of  money  were  understood,  no  nation  would  at- 
tempt anything  of  this  kind.  It  is  mathematically  certain 
that  the  unit  has  no  direct  relation  to  the  quantity  of  metal 
which  localizes  and  limits  it. 

Because  it  values  as  a  unit,  its  valuing  power  in  general 
prices  depends  upon  the  total  number  of  units  distributed 
throughout  the  world.  Local  rise  and  local  fall  of  prices 
follow  the  disturbance  of  that  distribution  through  war  and 
violence,  famine,  national  loss  and  gain  in  productive  power, 
scarcity  through  war  or  accident,  credits  given  by  merchants 
on  sales  of  some  commodities,  and  gradual  rise  and  fall  of 
general  prices  through  the  systematic  accumulation  of  its  units 
in  banks,  whatever  may  be  the  material  of  the  unit  or  the 
mode  of  its  limitation.  Hereby,  through  excess  of  loans  over 
and  above  those  which  can  be  maintained,  were  the  distribu- 
tion of  the  units  undisturbed,  production  advances  in  propor- 
tion, and  in  regular  progression,  and  the  expanded  use  of  the 
valuing  units  with  it,  until  it  can  go  no  farther,  and  a  con- 
traction of  production,  of  loans  and  of  money  prices  which  is 
known  by  the  name  of  Banking,  Commercial  and  Industrial 
Crisis,  naturally  follows. 

The  quantity  of  metal  in  a  unit  being  not  an  end  in  itself, 


506 


POLITICAL  ECONOMY. 


but  only  means  to  an  end,  should  a  government  add  to  the 
quantity  in  its  unit,  its  only  effect  would  be  a  diminution,  by 
a  very  slight  ratio,  of  the  total  of  metallic  units  throughout 
the  world,  although  the  ratio  of  increment  of  mass  of  metal 
in  the  unit  might  be  large.  The  former  ratio  might  be  one 
per  cent,  while  the  latter  would  be  ten  per  cent.  The  same 
principle  would  apply  if  the  quantity  of  metal  in  the  unit 
were  reduced.  If  there  were  but  one  nation  and  one  mint 
in  the  world,  money  would  be  always  money,  and  never 
treated  as  bullion  until  sold  as  such  for  purposes  of  manufact- 
ure other  than  money,  or  sent  to  the  mint.  The  duty  of 
government,  would  be  by  maintaining  the  unit  of  weight  of 
each  metal  uniform,  to  maintain  a  steady  ratio  of  increment 
of  units  being  coined,  to  units  already  coined. 


CHAPTER  XXX. 


THE  PURPOSES  TO  WHICH  PRODUCTION  ON  CREDIT  IS  AP- 
PLIED :  THE  MOVEMENTS,  BOTH  SUBSTANTIAL  AND  SPEC- 
ULATIVE, WHICH  RESULT  FROM  THE  USE  OF  THE  CREDIT 
FUND  SUPPLIED  BY  PRODUCTION  ON  CREDIT,  IN  THE 
SHAPE  OF  REALIZED  TAXES,  TARIFFS,  INTEREST,  WAGES 
AND  PROFITS:  DISTRIBUTION  AND  CONSUMPTION  ON 
CREDIT:  PRACTICAL  REMARKS  ADAPTED  TO  THE  PRES- 
ENT CONDITION  OF  THE  UNITED  STATES:  OF  DISTRIBU- 
TION AND  CONSUMPTION  UPON  CREDIT  IN  EXPECTATION 
OF  PAYMENT  BY  PRODUCTION  AND  EXCHANGES  IN  THE 
FUTURE,  —  CONSIDERED  NATIONALLY  AND  INTERNATION- 
ALLY. 

Production  on  credit  is  a  new  term  which  I  have  intro- 
duced, and  it  requires  careful  analysis  to  indicate  its  meaning 
in  the  extended  sense  in  which  I  use  it.  To  suppose  that 
I  mean  by  the  term  an  excess  of  cotton  or  woolen  cloth,  iron, 
boots  and  shoes,  hats,  or  fine  silks  only^  would  be  a  great 
mistake. 

To  produce  gigantic  results,  causes  as  gigantic  as  the  re- 
sults are  demanded.  The  articles  enumerated  do  not  consti- 
tute all  the  necessaries  relative  to  civilization,  although  they 
do  constitute  an  exceedingly  important  part  of  them.  There 
is  less  relative  danger  of  these  than  of  many  other  things 
being  overproduced,  because  they  may  be  said  to  rank  next 
in  order,  if  we  include  comfortable  shelter,  to  absolute  neces- 
saries themselves.  Nevertheless,  by  the  aid  of  modern  im- 
provements, they,  and  the  raw  material  out  of  which  they  are 
made,  can  be,  have  been,  and  are  being  produced  by  nations 
possessing  much  skilled  labor,  much  capital,  and  great  energy, 
in  excess  of  absolute  necessaries.  The  latter  never  increase 
in  advance  of  population ;  and  as  to  them,  the  range  of  waste 


508 


POLITICAL  ECONOMY. 


and  economy  is  comparatively  limited,  while  the  range  of 
possible  economy  in  the  articles  enumerated  is  comparatively 
large.  Such  has  been  the  fact  for  a  long  time,  but  it  has 
been  disputed  by  numerous  writers  who  have  followed  in 
the  tracks  of  older  writers,  and  have  almost  compelled  even 
the  immediate  sufferers  from  relative  overproduction  to 
suppose  that  their  sufferings  were  imaginary.  At  last  the 
truth,  after  so  much  practical  and  constantly  accumulating 
evidence  of  its  existence,  has  begun  to  dawn,  and  with  a  con- 
stantly increasing  ratio  of  relative  overproduction  as  com- 
mercial crisis  after  crisis  makes  its  appearance,  the  minds 
of  men  are  convinced  that  they  have  been  mistaken  in  ac- 
cepting abstract  theories  instead  of  plain  facts,  and  they  are 
anxiously  inquiring  into  the  source  and  origin  of  so  much 
misfortune.  The  subject  is  vast,  and,  what  makes  it  more 
difficult  to  be  understood,  it  is  exceedingly  complex.  It  de- 
mands ability  to  comprehend  it  as  a  whole  composed  of  almost 
numberless  co-factors,  working  towards  a  joint  result,  and 
at  the  same  time  to  follow  up  and  lay  open  by  rigorous  anal- 
ysis the  separate  operation  and  the  source  of  each  of  the 
factors,  considered  by  itself.  I  lay  down  this  general  prop- 
osition as  the  result  of  my  investigations.  After  a  careful 
examination  of  the  whole  subject  for  years,  and  after  reach- 
ing mentally  from  one  point  to  another  in  the  progress  of 
analysis,  I  have  come  to  the  conclusion  that  many  of  the 
opinions  referred  to  and  entertained  by  most  of  the  later  as 
well  as  older  writers,  are  true  in  a  subordinate  sense.  I  say 
subordinate,  because  the  investigators  were  unable  to  trace 
them  back  to  the  active  causes,  and  therefore  came  far  short 
of  the  truth.  What  they  affirm  is  true  subjectively  and  not 
objectively ;  as  effect,  but  not  as  cause.  This  is  preemi- 
nently the  case  in  respect  to  this  very  question  of  relative 
overstock.  It  is  certainly  false  in  point  of  fact,  to  assert  that 
there  has  not  been  a  surplus  of  iron  and  other  manufactured 
commodities  that  could  not  be  sold  for  wheat  or  provisions. 
If  it  could  have  been  sold  for  these,  many  establishments 
now  closed  would  be  open,  and  many  hands  now  idle  would 
be  employed.    Nevertheless,  if  I  have  demonstrated  any 


PRODUCTION  ON  CREDIT. 


509 


proposition  whatever  in  the  preceding  pages  to  those  who 
are  willing  to  be  reasoned  with  on  this  subject,  it  is  that  the 
absolute  would  control  the  relative,  at  short  intervals,  as  the 
balance  wheel  of  a  great  engine  controls,  at  short  intervals, 
the  several  parts,  if  there  could  be  and  were  a  condition  of 
production  and  commerce  as  advanced  as  these  now  are  in 
the  United  States,  going  on  as  easily  and  readily  without 
the  aid  of  the  auxiliary  exchange  furnished  by  the  use  of 
money,  as  the}'^  now  do  with  money.  Laborers  and  producers 
must  be  fed  ;  bare  walls  and  machines  will  not  support  them, 
and  wages  and  profits  to  live  upon,  for  long  periods,  could  not 
be  obtained  by  loans  after  capital  had  been  locked  up  in  over- 
stock. The  great  loss  in  the  overstock  and  the  rise  of  the  ar- 
ticles not  in  overstock  and  being  constantly  consumed,  would 
check  overproduction  at  such  short  intervals  that  we  might 
well  conclude  that  although  M.  J.  B.  Say's  abstract  propo- 
sition that  there  can  be  no  overproduction,  is  not  true,  yet 
the  periods  would  be  seen  to  be  so  short  by  reason  of  the 
control  over  the  production  of  relative  in  the  limit  to  the 
production  of  absolute  necessaries,  that  for  all  practical  pur- 
poses the  proposition  might  be  conceded.  With  money  in 
use  it  is  otherwise :  money  is  in  some  way  the  cause  of  the 
difference,  and  I  have  endeavored  to  show  wherein  and  why. 

Again,  Adam  Smith  and  most  English  writers  say,  labor 
is  the  measure  of  values,  and  therefore  the  cost  in  labor  of 
mining  and  smelting  gold  and  silver  is  the  cause  and  the 
measure  of  their  value  in  exchange.  It  is  inconceivable  that 
the  labor  of  a  miner  in  finding  or  mining  an  ounce  of  silver, 
either  in  the  past,  the  present,  or  the  future,  should  deter- 
mine its  value  in  exchange  at  all  times,  or  at  any  time,, for 
a  bushel  of  wheat  or  for  anything  else.  It  is  easily  conceiv- 
able, however,  that  if  the  miner  cannot  live,  on  the  whole,  as 
well  at  mining,  and  with  as  much  gain  and  comfort  as  at 
some  other  occupation,  he  will  leave  it  as  soon  as  he  can  get 
away,  and  find  something  else  to  do ;  and  so  of  all  occupa- 
tions. As  a  result  and  not  a  cause,  it  may  be  said,  then,  not 
that  labor  measures  anything,  but  that  the  active  causes  at 
work  tend  to  equality  of  compensation  in  labor  of  the  same 


510 


POLITICAL  ECONOMY. 


grade  of  skill ;  and  on  the  whole,  therefore,  to  equality,  after 
allowing  for  all  possibilities. 

Again,  credit  is  said  to  be  the  cause  of  commercial  and 
banking,  and  it  might,  therefore,  be  added,  industrial  crises. 
This  again  is  true  as  an  effect,  but  not  as  a  cause.  Produc- 
tion on  credit  is  the  cause,  and  credit  is  the  result.  If  pro- 
duction on  credit  were  continually  balanced  by  sales  to  pro- 
ducing consumers  for  cash,  there  could  be  no  such  thing  as 
a  commercial,  industrial,  or  banking  crisis,  because  there 
could  be  no  accumulation  of  stocks.  The  credit  given  by 
banks  and  capitalists  who  lend  money  is  not  the  cause  of 
a  crisis,  but  the  result  of  loans.  If  A.  borrows  ten  thousand 
dollars  in  bank,  and  it  stands  to  his  credit  without  being 
used,  it  has  no  effect  upon  production.  It  is  the  use  of  the 
credit  by  taking  money  out  of  the  reserve  and  paying  it  to 
labor,  which  produces  the  result  called  a  crisis.  Men  are  the 
actors,  and  loans  of  money  the  instruments,  by  which  they 
enable  labor  to  support  itself  through  the  purchase  of  arti- 
cles which  other  producing  consumers  have  produced  and 
sold,  while  labor  was  producing  the  overstock.  The  real 
credit  given  in  the  case,  is  to  the  producer  of  relative  neces- 
saries, who  obtains  absolute  necessaries  upon  the  pledge  of 
his  overstock  and  capital.  This  is  the  real  credit  which  is 
concealed  by  the  auxiliary  exchange  of  money,  and  stands  be- 
hind it.  Again,  it  is  said  that  sales  make  deposits.  This  is 
impossible,  because  sales  of  goods  arise  from  the  production 
of  goods.  If  there  were  no  production  there  could  be  no 
sales,  and  therefore  no  deposits.  Whoever  buys  goods  with 
the  proceeds  of  a  bank  loan,  steps  directly  into  the  shoes  of 
the  producer,  and  it  is  all  one  whether  the  loan  stands  in 
the  original  producer's  name  or  not.  Deposits,  therefore,  rep- 
resent so  much  production  and  not  so  many  sales. 

Deposits  show  the  whole  cost  of  production  brought  about 
by  bank  loans  up  to  any  given  period,  adding  profits  on  all 
the  different  sales,  not  in  a  producing  consumer's  market, 
but  in  the  market  of  purchasers  who  buy  with  bank  money 
and  have  not  yet  sold  in  a  producing  consumer's  market. 
The  result  of  the  whole  process  immediately  before  a  commer- 


PKODTJCTION  ON  CREDIT. 


511 


cial  and  banking  crisis,  is  a  gigantic  accumulation  of  results 
which  will  not  pay  the  investers.  It  is,  in  a  true  and  real 
sense,  in  its  results,  a  system  of  credit,  but  not  in  its  incep- 
tion, as  affirmed  by  Mill  and  Price.  It  is  not  ordinary  credit, 
but  the  credit  which  results  from  using  the  conventional 
commodity  or  the  conventional  units  of  money  in  such  ex- 
cess of  actual  commerce,  that  a  crisis  is  unavoidable.  They 
(Mill  and  Price)  call  the  use  of  money  one  thing,  and  the 
use  of  credit  in  bank  another  thing.  Here  lies  their  mistake. 
There  is  no  ordinary  credit  used  :  that  is  simply  impossible. 
What  really  takes  place,  is  a  circulation  or  use  of  money  into 
and  out  of  and  in  the  reserve,  through  the  instrumentality 
of  loans  to  producers  in  excess  of  sales  for  cash.  I  mean  by 
cash,  money  received  from  buyers  who,  with  money  not  bor- 
rowed, buy  to  consume,  or  to  sell  to  those  who  will  consume. 
Production  on  credit  through  bank  loans  comes  from  the  loan 
and  use  of  money  oftener  than  it  is  returned  through  the  ex- 
changes from  the  market  of  producing  consumers,  who  have 
mutually  exchanged  productions  through  the  instrumentality 
of  money.  Credit  is  the  result  and  there  is  an  immense  accu- 
mulation of  it,  before  a  commercial  crisis.  Mr.  Price  makes 
one  remark  in  his  Principles  of  Currency,  which,  if  followed 
up,  would,  like  a  clew  in  a  labyrinth,  lead  out  to  the  light 
of  fact  and  truth.  He  says  a  perfect  bank  would  be  one 
whose  payments  and  receipts  were  equal.  If  all  banks  were 
of  this  kind,  there  could  be  no  banking  crisis,  because  the  ex- 
changes of  commodities  would  equal  their  production.  The 
nearest  practicable  approach  to  such  a  condition,  after  pro- 
duction on  credit  has  reached  as  high  figures  as  it  will  bear 
and  can  sustain,  is  what  I  mean  by  a  regulated  ratio  of  re- 
serve to  bank  debt.  This  would  be  the  only  method  (if  in- 
deed it  be  practicable  at  all)  of  carrying  out  the  suggestive 
remark  of  Mr.  Price. 

But  I  have  said  that  production  on  credit  does  not  end 
with  an  excess  of  such  articles  as  cloth  or  iron  only.  If  this 
is  true,  it  does  not  end  with  commercial  bank  debt,  moving 
as  an  instrument,  and  but  once  only,  the  money  in  the  re- 
serve.   It  is  used  again  and  again,  and  commercial  bank 


512 


POLITICAL  ECONOMY. 


loans,  vast  as  is  their  volume,  are  only  the  foundation  upon 
which  the  grand  superstructure  of  production  on  credit  is 
built  up.  They  furnish  out  of  total  banking  reserve  in  the 
shape  of  metal  and  notes  in  England,  and  the  United  States, 
the  currency  which  runs  into  and  out  of  banking  reserve 
through  payments  to  and  from  depositors,  and  the  resulting 
payments  to  and  from  other  sellers  and  buyers  everywhere. 
This  rapid  movement  of  currency  is  what  Mr.  Mill  calls 
rapidity  of  circulation.  It  is  not  rapidity  of  circulation,  in  a 
producing  consumer's  market,  but  an  increasing  use  of  depos- 
ited units  of  valuation,  purchase  and  payment  in  the  shape 
of  coin  and  notes,  proportioned  not  to  consumption  but  to 
increasing  production.  In  all  exchanges,  those  of  money  on 
the  one  hand  and  goods  on  the  other,  there  is  a  comparison 
made  between  the  things  exchanged.  On  the  side  of  money 
it  is  a  unit  only,  because  money  has  no  conceivable  relation 
to  all  other  things  exchanged  for  it,  but  that  of  abstract  units. 
Hence  all  capital  and  goods  are  valued  in  units  of  money. 
That  is  the  mode  of  valuing  one  estate  as  compared  with  an- 
other, and  one  stock  or  parcel  of  goods  with  another  ;  as  when 
we  say,  A.  is  worth  ten  thousand  dollars,  and  C.  and  D.  have 
stocks  of  goods,  respectively  valued  at  fifteen  and  twenty 
thousand  dollars.  Upon  the  same  principle,  the  commission 
appointed  of  late  in  London  to  ascertain  by  tables  of  prices  in 
India,  before  the  late  demonetizations  in  silver,  and  tables  of 
prices  there  since  those  demonetizations,  whether  the  fall  in 
silver  bullion  had  changed  general  prices  in  India,  declared  as 
the  result  of  the  inquiry  that  no  changes  were  discovered  ;  and 
the  conclusion  in  London  was,  that  silver  had  only  fallen 
relatively  to  gold.  This  is  apparently  true  in  London.  Sil- 
ver has  fallen  in  rates  of  barter  exchange  as  bullion,  with 
gold  in  the  London  market ;  but  in  markets  where  silver  is 
the  standard,  gold  has  risen.  Gold  must  have  risen,  there- 
fore, one  half,  and  silver  must  have  fallen  the  other  half; 
the  rise  and  fall  of  each  being  mutual  equivalents.  In  com- 
mon parlance,  however,  it  may  be  said  that  silver  has  fallen 
all  the  way  in  London,  instead  of  half  way.  It  is  of  no  real 
importance  in  what  terms  the  barter  exchange  is  stated,  ex- 


PRODUCTION  ON  CREDIT. 


513 


cept  as  it  may  aid  in  furnishing  correct  ideas  about  money. 
The  important  fact  to  notice,  is  the  verification  furnished  by 
the  two  tables  of  East  Indian  prices,  of  the  d  priori  demon- 
stration, and  the  demonstration  by  analysis,  that  money  is  a 
series  of  units  limited  as  already  stated,  which  I  have  given 
in  various  forms  in  the  preceding  chapters.  Commercial 
banks  furnish,  through  loans,  the  units  of  money  which  buy 
the  necessaries  of  every  kind  consumed  by  a  very  large  num- 
ber of  laborers  of  all  sorts  who  are  out  of  the  agricultural 
field,  which  furnishes  the  absolute  necessaries  of  life ;  and  in 
point  of  science  it  is  immaterial  whether  the  units  are 
counted  out  in  metal  or  paper :  it  is  only  a  question  of  pro- 
portion, of  limitation,  and  of  steadiness.  Vast  sums  are  de- 
posited by  laborers  in  savings  banks,  and  redeposited  by  these 
in  commercial  banks.  The  latter  deposits  are  not  used  merely 
once  for  all :  they  are  loaned  out  on  the  checks  of  savings 
banks,  and  deposited  and  redeposited  from  time  to  time. 
We  must  look  to  savings-bank  loans  if  we  wish  to  get  any 
idea  of  the  immense  amount  of  production  on  credit  continu- 
ally occurring.  The  savings  banks  thus  become,  not  the  orig- 
inators of  production  on  credit,  in  a  banking  sense,  but  the 
potent  auxiliaries  of  commercial  banks  in  maintaining  it. 

Again,  furnaces,  mills,  and  factories  produce  immense 
quantities  of  iron  and  iron  rails,  lumber,  building  materials, 
cloth,  etc.,  largely  with,  and  partially  without  bank  loans. 
Large  quantities  are  sold  to  buyers  who  purchase  with  the 
aid  of  commercial  banks,  and  to  some  extent  savings-bank 
loans,  and  pay  the  producers  with  the  proceeds  long  before 
producing  consumers  buy  with  cash.  This  furnishes  an  im- 
mense fund  out  of  which  wages,  profits,  and'  dividends  are 
paid  over  to  different  persons  from  the  proceeds  of  sales  of 
goods,  which  are  yet  waiting  for  buyers  who  have  cash  de- 
rived from  sales  in  the  markets  of  sound  commerce  to  pro- 
ducing consumers,  who  have  bought  goods  to  consume,  or  to 
sell  to  those  who  will  consume.  The  enormous  fabric  thus 
built  up  increases  by  expending  the  profits  and  dividends 
thus  earned  in  the  erection  of  houses  and  warehouses,  and 
in  the  purchase  of  land,  whose  value  rises  with  improvements 

33 


514 


POLITICAL  ECONOMY. 


and  prospective  improvements.  This  land  may  be  bought 
for  cash  or  for  a  payment  in  cash,  and  a  promise  of  future 
payments,  secured  by  the  land,  or  unsecured.  Another  part 
of  the  same  profits,  interest  and  dividends,  may  be  invested 
in  railroad  stocks  and  debentures ;  in  town,  city,  and  county 
bonds,  given  in  aid  of  railroads,  and  to  make  municipal  im- 
provements, in  advance  of  the  surrounding  country. 

This  is  a  part  of  the  grand  system  which  I  refer  to  under 
the  term  Production  on  Credit.  It  has  been  of  late  enor- 
mously increased  by  the  loss  of  a  much  larger  portion  of  our 
national  debt  than  ought  to  have  been  sent  abroad  at  low 
figures,  in  exchange  for  English  goods  at  very  high  figures, 
and  for  luxuries,  some  of  which  we  could  have  dispensed 
with,  while  the  consumption  of  the  latter  was  largely  in- 
creased by  the  increase  of  the  very  cause  which  continually 
made  us  less  and  less  able,  as  it  progressed,  to  buy  them. 

The  grand  business  of  the  world  is  production  and  ex- 
change. Unless  and  until  production  —  the  business  which 
is  the  source  and  origin  of  money  exchanges — is  disturbed  in 
some  way,  there  can  be  no  serious  disturbance  in  the  money 
exchanges  themselves ;  for  inability  to  make  the  money  ex- 
changes necessary  to  pay  debts,  comes  from  inability  to  sell 
the  products  of  labor.  All  this  results  from  the  conventional 
value  of  money  :  the  fact  that  it  is  used,  is  what  gives  it  value 
as  money,  and  probably  seventy-five  per  cent,  of  the  supposed 
intrinsic  value  in  gold  coin  depends  upon  the  fact  that  it  is 
so  used.  Whoever  sells  goods  for  money,  is  by  universal  con- 
vention credited  with  the  right  to  buy  with  it  any  goods  he 
wants.  This  is  all  he  stands  credited  with,  because  it  is  all 
he  has  given  in  exchange.  To  credit  those  to  whom  banks, 
by  the  aid  of  the  incoming  stream  of  deposits,  may  lend  money 
with  anything  whatever,  is  to  credit  them  in  excess  of  what 
all  depositors  as  a  whole,  are,  by  original  convention,  entitled 
to ;  and  to  do  so  must  necessarily  block  the  regular  exchanges 
of  commodities,  unless  some  definite  limit  to  the  use  can  be 
fixed.  If  money  is  used  in  excess  of  real  exchanges,  it  must 
inevitably  be  used  in  producing  commodities  in  excess  of 
those  exchanges.    The  very  essence  of  such  excessive  use  lies 


PRODUCTION  ON  CREDIT. 


515 


in  the  fact  that  those  who  so  use  money  stand  debited  to  the 
actual  exchanges  to  the  precise  amount  by  which  they  thu^ 
use  it,  —  in  other  words,  put  it  in  circulation;  in  still  other 
words,  cause  expansion  of  circulation.  This  debit  can  never 
be  extended  far,  where  money  and  commodities  are  distrib- 
uted together,  and  the  money  is  not  banked,  because  the 
money  can  only  come  into  each  money  reserve  as  fast  as  it 
comes  through  the  regular  exchanges  of  commodities,  and 
therefore  of  money  itself,  —  in  other  words,  actual  commerce. 

Bank-notes,  in  the  absence  of  deposit  loans,  being  distrib- 
uted with  commodities  in  the  course  of  national  commerce 
precisely  as  gold  and  silver  themselves  are,  can  by  no  pos- 
sibility be  used  in  any  different  manner  from  gold  and  silver 
themselves  when  so  distributed,  except  through  excessive 
issues  which  deplete  the  redemption  reserve  ;  and  this,  as 
Adam  Smith  plainly  proved,  must  soon  come  to  an  end,  .as 
in  the  case  of  the  Bank  of  Ayr.  It  is  not  bank-notes,  then, 
without  reference  to  deposit  loans,  as  commonly  supposed, 
whose  overissue  causes  commercial  crises ;  it  is  the  unlim- 
ited use  of  the  same  money  over  and  over  again  in  excess 
of  the  actual  exchanges  in  producing  consumers'  markets,  — 
a  use  unlimited  in  the  very  nature  of  things  except  by  a 
crisis,  —  which  in  reality  constitutes  the  credit  of  which  writ- 
ers speak.  This  use  applies  to  gold  and  silver,  or  paper  cov- 
ering exactly  equal  amounts  of  gold  and  silver,  as  well  as  to 
ordinary  bank-notes  or  government  notes,  under  a  system  of 
deposit  and  discount  banking.  If  there  were  no  gold  and 
silver,  but  only  a  limited  amount  of  government  or  bank 
paper,  circulated  as  gold  and  silver  and  convertible  bank- 
notes are,  the  principle  would  be  the  same.  It  would  be 
precisely  the  same  thing  if  a  limited  amount  of  units  of 
bank  credit  without  any  reserve  were  put  in  circulation  by 
checks.  If  all  mone}^  were  kept  in  deposit,  and  no  bank 
loans  were  made,  the  whole  volume  of  units  of  money  being 
meantime  neither  increased  nor  diminished,  there  could  be 
no  excess  of  circulation  over  and  above  the  distribution  of 
commodities ;  but  as  soon  as  loans  were  made,  the  condi- 
tions rendering  an  excess  of  circulation  possible  would  at 
once  arise. 


616 


POLITICAL  ECONOMY. 


The  banking  would  consist  in  the  deposit  of  the  universally 
recognized  units  of  value,  purchase  and  payment,  whatever 
the  material  or  form  they  might  appear  in,  and  lending  them 
to  borrowers,  retaining  enough  to  pay  depositors.  In  the 
case  of  the  units  of  bank  credit,  —  were  they  deposited,  —  the 
conditions  necessary  to  making  loans  would  always  exist, 
because  they  would  be,  from  the  start,  localized  on  the  bank 
books.  In  the  other  case,  they  would  be  deposited  in  the 
shape  of  notes  ;  but  in  both,  there  would  be  no  effect  pro- 
duced by  the  deposit  until  the  banks  began  to  make  loans. 
The  nature  of  all  money  is  the  same  as  respects  production 
and  exchange.  The  material  difference  lies  in  steadiness ; 
and  steadiness  depends  upon  steadiness  of  volume  and  of  cir- 
culation. It  is  said  that  a  commercial  crisis  lies  in  the  loss 
it  produces  ;  that  is  equivalent  to  saying  that  a  cause  lies  in 
i4:s  effects.  It  is  not  true  that  loss  is  the  cause,  although  it 
is  one  of  the  results.  The  Northern  Pacific  Railroad  is  not 
an  entire  loss.  That  road  and  many  others  cost  more  than 
twice  as  much  as  they  are  now  worth,  because  excessive  pro- 
duction, while  it  is  going  on,  advances  prices.  Other  roads 
cost  twice  as  much,  and  some  less.  But  take  all  the  new 
roads  together,  and  most  of  them  would  pay,  at  half  their 
cost.  If  a  road,  however,  pays  but  little  more  than  run- 
ning expenses,  it  is  a  benefit  to  the  country  through  which 
it  is  laid.  Taking  all  the  new  roads  together,  the  builders 
have  builded,  not  wisely  for  themselves,  but,  in  a  limited 
sense,  well  for  others.  They  have  given  lands  an  additional 
value,  equal  at  least  to  what  the  roads  are  now  worth  them- 
selves ;  but  this  additional  value  will  not  help  the  exchanges 
until  the  lands  are  occupied  and  the  surplus  produce  sent  to 
market.  The  loss  then  lies  in  the  losses  of  those  who  have 
built  the  roads,  and  in  the  immense  moral  loss  arising  from 
their  bankruptcy  and  ruin.  Not  to  include  the  latter  item, 
is  to  fail  in  a  just  analysis  of  the  complex  result.  But  again, 
the  producers  of  iron  have  been  the  promoters  of  civilization 
and  progress,  by  making  and  furnishing  the  iron  rails,  which, 
by  being  laid  down,  have  caused  such  increased  value  to 
land.    The  loss  lies  also  in  their  bankruptcy  and  ruin,  and 


PRODUCTION  ON  CREDIT. 


517 


the  results  which  follow.  We  may  add  to  these  some  of  the 
producers  of  rolling  stock  and  other  equipments. 

But  the  producers  of  cloth  and  of  clothing  have  lost  also. 
The  losses  of  these  producers,  however,  are  soonest  compen- 
sated, as  far  as  compensation  is  possible,  because  the  pro- 
ducing consumers'  market  catches  up  with  their  production 
soonest.  These  producers  have  not  been  making  an  entire 
loss  for  the  whole  countr^^  as  asserted  :  they  are  merely  ahead 
of  time.  The  worst  results  are  in  the  more  speculative 
markets,  where  the  investments  were  known  to  be  of  that 
character,  but  were  rendered  possible  by  the  former.  In  the 
case  of  the  iron  and  cloth,  the  buyers  were  involuntary  spec- 
ulators, because  they  did  not  know  that  they  were  such  ;  in 
the  other  case,  the  adventurers  had  reason  to  suspect  that 
they  were  such. 

The  only  remedy  in  the  case,  if  possible  remedy  there  be, 
is  to  regulate,  by  a  fixed  limitation,  the  original  cause,  and  at 
a  point  indicated  everywhere,  limit  actual  producers  and 
their  co-partners,  the  bankers,  by  the  same  rule  which  limits 
all  producers  and  capitaHsts  in  France.  That  limitation  is 
the  impossibility  of  borrowing  after  a  certain  point  in  pro- 
duction is  reached,  until  there  is  a  sale  of  what  is  already 
produced.  But  even  then,  production  on  credit  would  be 
allowed  to  a  greater  extent  than  in  France.  It  would  be 
allowed  up  to  a  point  which  would  maintain  a  minimum 
average  of  reserve.  As  long  as  the  reserve  continued 
above  minimum,  loans  could  be  made,  and  this  would  allow 
some  production  on  credit  in  addition  to  what  can  be  found 
in  France,  but  would  stop  it  everywhere  at  the  same  point, 
and  keep  it  from  proceeding  so  far  that  its  only  check  would 
be  a  crisis.  Producers  would  have  all  the  benefit  they  might 
under  any  circumstances  be  able  to  receive  from  protection, 
because  they  would  not  lose  in  rising  prices  of  absolute 
necessaries  more  than  protection  could  gain  for  them. 

The  only  possible  remedy,  while  banks  of  deposit  and  dis- 
count furnish  the  credit  circulation  of  money  over  and  above 
actual  exchanges  of  commodities,  out  of  which  they,  as  co- 
partners with  actual  producers  of  all  sorts,  including,  of 


618 


POLITICAL  ECONOMY. 


course,  merchants,  make  their  fixed  share  of  credit  profits  in 
the  shape  of  discount,  lies  in  limiting  the  means  which  enable 
the  production  to  go  on.  That  it  goes  on  by  means  of  bank- 
ing reserve  I  have  demonstrated,  but  it  is  hard  to  understand 
at  first  thought,  because  the  relation  between  banking  re- 
serve and  production  seems  so  remote.  It  seems  remote, 
because  the  credit  nature  of  all  money  is  not  perceived.  It 
is  almost  impossible  not  to  act  instinctively  upon  the*  idea 
that  gold  coin  is  a  thing  valuable  in  itself,  in  its  character  of 
money.  There  is  but  one  way  to  dispel  the  illusion,  and  that 
is  to  think  of  metallic  money  as  yaluing  units  in  the  reserve, 
placed  there  not  by  bankers,  but  by  sellers  who  have  brought 
the  money  from  the  market  where  they  have  sold  commodities 
for  consumption  and  have  received  the  units  in  payment.  To 
regulate  the  number  of  the  units  of  bank,  debt  by  these  units 
is  to  regulate  loans  by  actual  commerce,  and  not  by  produc- 
tion ;  it  is  to  limit  production  by  actual  sales  to  consumers. 
But  as  bank  debt  rises  with  production,  to  regulate  bank 
debt  is  to  regulate  production  itself.  In  this  manner,  a  true 
conception  may  at  last  be  formed  of  the  reason  why  metal 
is  needed  in  banking  reserve,  and  why  needed  to  stand  in 
reserve  behind  bank-notes.  It  is  in  order  to  limit  the  units 
of  production,  by  units  themselves  limited  by  a  metallic  com- 
modity, and  distributed  in  proportion  to  the  commerce  of 
exchanges  of  actual  consumption,  and  not  of  production. 
Upon  the  theory  of  money  being  itself  a  commodity,  all  that 
can  be  said,  and  all  that  is  said  upon  the  subject  of  banking 
reserve,  for  either  banks  of  issue,  or  of  deposit  and  discount, 
is  unintelligible  chaos.  What  is  said  in  this  chapter,  if  care- 
fully studied,  will  enable  the  reader  to  understand  the  real 
causes  of  banking  and  commercial  crises.  What  is  needed 
in  the  United  States,  at  this  time,  is  a  currency  of  steady 
purchasing  power,  which  will  harmonize  production,  and 
bring  commercial,  industrial,  and  banking  disturbances  to  a 
minimum,  under  the  present  system  of  loans.  This  is  a 
practical  kind  of  political  economy,  or  science  of  production 
and  exchange,  which  is  eminently  needed  at  this  time,  and 
in  which  I  invoke  the  aid  of  all  conservative  bankers  as  well 


PRODUCTION  ON  CREDIT- 


519 


as  thinkers.  The  subject  is  so  new  and  so  complex,  that  I 
have  introduced  it  under  every  possible  form,  and  from  every 
possible  point  of  view.  The  germ  of  all  true  conceptions  of 
money  lies  in  the  masterly  suggestion  of  the  genius  of  Mon- 
tesquieu, in  the  story  of  the  African  macoutes. 

THE  MOVEMENTS,  BOTH  SUBSTANTIAL  AND  SPECULATIVE, 
WHICH  RESULT  FROM  THE  USE  OF  THE  CREDIT  FUND, 
ARISING  FROM  PRODUCTION  ON  CREDIT  IN  THE  SHAPE 
OF  REALIZED  TAXES,  TARIFFS,  INTEREST,  WAGES,  AND 
PROFITS. 

In  the  chapter  on  Capital,  Labor,  and  Wages,  and  in  that 
on  Interest,  Rent,  and  Taxes,  I  have  shown  that  taxes,  in- 
terest, rent,  and  wages,  are  payable  out  of  profits.  Net  profits 
are  the  remainder  which  is  left  as  the  result  of  production, 
after  paying  taxes,  interest,  rent,  and  wages,  in  the  order 
named. 

Now,  if  a  considerable  part  of  the  whole  fund  consists  of 
money  received  for  goods  sold  to  merchants,  who  cannot  sell 
more  than  seventy-five  per  cent,  of  their  product  to  go  into 
consumption,  in  consequence  of  an  excess  of  production  on 
credit,  it  is  certain  that  the  money  thus  received  out  of  the 
profit  fund  is  in  advance  of  a  consumer's  market,  and  its 
movement  is  therefore  in  reality  speculative,  although  it  car- 
ries the  appearance  of  solid  trade.  Overtrading  is  not  the 
active  cause.  It  is  excessive  production  on  credit  which  has 
led  the  merchant,  unconsciously,  to  overtrading ;  that  is  to 
say,  to  buying  more  than  he  can  sell ;  and  this  may  be  called 
speculating  unconsciously.  If  a  mill-owner  borrows  one  hun- 
dred thousand  dollars  from  time  to  time,  and  makes  a  mill- 
ion yards  of  cotton  cloth,  and  sells  it  to  two  merchants  who 
hold  it  for  want  of  a  consumer's  market,  having  themselves 
borrowed  the  money  of  the  banks  and  paid  it  over  with  ten 
thousand  dollars  more  as  profits  to  the  mill-owner,  who  pays 
over  one  hundred  thousand  dollars  of  it  to  the  banks  to  re- 
tire his  loans,  the  result  is  that  one  hundred  and  ten  thou- 
sand dollars  of  new  bank  loans  to  the  two  merchants  have 
taken  the  place  of  one  hundred  thousand  in  bank  loans  to 


520 


POLITICAL  ECONOMY. 


the  mill-owiier.  The  ten  thousand  dollars  are  profits  on 
goods  which  have  not  yet  found  a  market,  because  they  were 
produced  on  credit  in  advance  of  all  consumption  which  had 
been  demonstrated  to  have  actually  taken  place.  These 
profits  may  be  invested  by  the  mill-owner,  if  he  is  the  sole 
owner  of  the  mill,  or  by  the  stockholders,  if  there  be  a  cor- 
poration, in  bonds  issued  by  a  city  or  town  to  make  munic- 
ipal improvements ;  in  railroad  bonds  or  stocks  of  a  new 
railroad  ;  in  the  manufacture  of  iron  or  of  lumber  and  build- 
ing materials  or  furniture ;  in  the  erection  of  city  houses,  or 
of  stores  to  hold  .goods  produced  on  credit ;  or  partly  in  city 
lots  to  hold  for  a  rise  with  a  mortgage  given  for  deferred 
payments.  Profits  of  this  kind,  thus  invested,  arise  very 
largely  from  discount  and  interest  on  loans  made  by  banks 
to  the  mercantile  community,  who  are  drawn,  by  buying  from 
first  producers,  into  overtrading,  not  by  any  fault  of  their 
own ;  not  by  any  fault  of  the  banks  ;  not  by  any  fault  of 
first  producers  ;  but  by  the  paramount  influence  of  forces 
which  irresistibly  compel  all  the  actors  in  this  grand  drama 
of  production  and  distribution  on  credit.  This  is  the  real 
credit  at  the  bottom  of  all  bank  loans  when  in  the  rising 
scale.  It  is  a  credit  resulting  from  the  loan  and  use  of  units 
of  conventional  value  called  money,  the  payments  of  which 
are  registered  on  bank-books  ;  but  the  registry  is  not  the  pay- 
ments themselves  any  more  than  the  entries  on  a  merchant's 
books  Efcre  of  themselves  sales  and  purchases.  In  this  manner 
and  under  the  disguise  of  production  on  credit,  taxes  are  paid 
upon  credit ;  rent  of  houses,  warehouses,  mills,  shops,  and  rail- 
roads is  paid  upon  credit ;  wages  are  paid  upon  credit ;  inter- 
est is  taken  out  in  advance  upon  credit ;  and  lastly,  the  surplus 
left  after  payment  of  taxes,  of  rent,  of  interest  and  of  wages, 
is  used  by  the  owners  of  it  to  invest  in  further  production  on 
credit,  until  the  foundation  of  actual  exchanges  is  insufficient 
for  the  superstructure,  and  it  tumbles  to  the  ground.  The 
chief  business  of  the  world  being  production  and  exchange, 
recovery  follows  first  in  that  kind  of  production  which  comes 
the  nearest  to  absolute  necessaries,  and  is  therefore  most 
rapidly  disposed  of.    To  understand  the  vast  and  complex 


PRODUCTION  ON  CREDIT. 


521 


movements  it  is  necessary,  by  the  aid  of  mental  discipline 
and  reflection,  to  keep  constantly  in  view  the  great  differ- 
ence between  the  mere  volume  of  money  —  the  total  number 
of  money  units  outside  and  inside  of  banks  —  and  the  use  or 
circulation  of  that  money.  If  the  money  unit  be  gold,  with 
subsidiary  coinage  of  silver  and  bank-notes,  with  a  nearly 
equal  amount  of  gold  behind  them,  as  in  England,  the  range 
of  prices  upward  may  not  be  as  high,  nor  on  the  other  hand 
the  range  of  prices  downward  as  low,  as  if  in  the  case  of  a 
merely  convertible  currency  issued  by  the  Bank  of  England, 
for  instance,  the  number  of  units  of  pounds  (in  the  shape 
of  bank-notes)  were  fifty  per  cent,  greater  than  it  is  when 
in  the  shape  of  metal,  and  notes  mostly  covered  by  metal ; 
but  the  relative  rise  and  the  relative  fall  is  the  same  in  both 
cases.  Deposit  and  discount  banking  is  something  peculiar 
to  itself,  and  a  standing  proof  of  the  fact  that  the  use  of 
money  is,  in  its  results,  an  efficient  system  of  credit,  and  the 
only  one  which  can  by  raising  general  prices  maintain  pro- 
duction on  credit  long  enough  to  produce  a  commercial  crisis. 
Prices  may  be  made  to  rise  rapidly  by  the  abandonment  of  a 
metallic  or  convertible  currency,  and  the  resulting  increase 
in  volume,  that  is  to  say,  in  the  actual  number  of  paper  units 
of  the  same  name  with  the  metallic  ones,  or  slowly  by  me- 
tallic production  in  excess  of  commerce.  This,  for  a  time, 
stimulates  production  by  means  of  rising  prices,  as  produc- 
tion of  all  kinds  was  stimulated  in  Great  Britain,  after  sus- 
pension of  payments  in  1797,  by  the  Bank  of  England  ;  and 
everywhere  by  the  increase  of  units  of  gold  and  silver,  after 
the  discovery  of  America  ;  but  the  additional  use  or  circula- 
tion of  money,  whether  in  the  form  of  metal  or  paper,  by 
means  of  deposit  and  discount  has  no  parallel  in  any  form 
of  credit,  and  is  like  nothing  but  itself  ;  for  it  causes  a  rising 
scale  of  prices,  through  an  additional  circulation  of  all  the 
money  deposited  over  and  above  what  it  could  have  if  not 
deposited.  This  additional  circulation  can  take  place  only 
by  unproductive  consumption  or  by  productive  consumption 
in  advance  of  a  consumer's  market. 

More  than  three  fourths  of  this  additional  use,  however, 


522 


POLITICAL  ECONOMY. 


is  applied  to  the  latter  purpose.  If  it  were  otherwise,  if 
one  half  of  the  additional  use  were  applied  to  unproductive 
consumption,  nearly  all  banks  would  become  bankrupt.  As 
it  is,  banks  have  the  producing  capital  of  the  country  to  ex- 
haust, before  they  can  be  exhausted  themselves.  Hence  pro- 
ducers, whether  manufacturers  or  merchants,  fail  and  become 
bankrupt  in  large  numbers,  while  banks  fail  occasionally, 
and  always  lose  largely  when  their  producing  partners  lose. 

The  greater  part  of  what  is  called  speculation  is  the  re- 
sult of  production  on  credit  to  excess.  A  fixed  ratio  of  re- 
serve can  alone  arrest  the  advancing  current  everywhere  at 
a  certain  point,  by  preventing  it  from  proceeding  far  enough 
to  cause  a  crisis  on  a  grand  scale  ;  consumption  balancing 
all  production  that  takes  place  so  long  as  that  ratio  of  re- 
serve can  be  maintained  ;  substituting,  perhaps,  a  series  of 
light  and  comparatively  unimportant  disturbances  of  the 
market  of  demand  and  supply  for  one  grand  and  over- 
whelming crisis. 

A  crisis  is  not  measured  wholly  by  the  inharmonious  pro- 
duction of  relative  necessaries  through  the  aid  of  bank  loans, 
although  they  are  the  active  and  primary  cause.  There 
is  no  proper  word  or  term  in  the  English  language  for  a 
crisis  like  that  inaugurated  in  1873  in  the  United  States. 
I  have  called  the  latter  in  this  work,  as  I  have  called  similar 
crises  in  the  United  States  and  Great  Britain,  a  commer- 
cial, industrial,  and  banking  crisis,  to  indicate  that  the  com- 
merce, the  industry,  and  what  is  called  the  loanable  money 
capital  of  the  whole  country  affected,  are  undergoing  great 
changes,  and  more  or  less  in  a  state  of  collapse.  But 
this  expression,  although  the  fullest  and  most  complete 
which  language  furnishes,  does  not  convey  an  adequate  idea 
of  actual  results.  The  absence  of  a  term  adequate  to  the 
expression,  and  even  the  indication  of  all  the  important 
changes,  furnishes  proof  of  the  fact  that  the  active  cause  is 
not  understood,  or,  perhaps,  even  imperfectly  comprehended. 
Why  should  it  be  understood,  when  the  nature  of  money 
itself  is  not  ?  I  have  called  the  fund  arising  from  sales  of 
the  results  of  labor  which  cannot  find  a  consumer's  market, 


PRODUCTION  ON  CREDIT. 


623 


to  intermediate  producers  in  the  character  of  merchants,  —  I 
might  add  "  speculators  "  and  adventurers  who  borrow  of 
the  banks  to  purchase  those  results,  —  the  credit  fund.  This 
fund  has,  of  course,  no  separate  existence  by  itself,  inde- 
pendently of  that  which  arises  from  a  consumer's  market. 
The  two  funds  are  found  together,  but  it  is  essential  for  the 
reader  to  keep  continually  before  his  mind  the  difference 
between  them.  A  stockholder  who  has  stocks  in  two  manu- 
facturing corporations,  receives,  as  I  will  suppose,  ten  thou- 
sand dollars  in  dividends  at  the  same  time,  five  thousand 
dollars  from  one,  and  five  thousand  dollars  from  the  other. 
The  dividends  are  declared  upon  net  profits  :  these  arise 
from  sales  to  merchants  ;  the  merchants  are  carrying  an 
overstock  consisting  of  fifty  per  cent,  of  all  goods  on  hand, 
and  the  fact  that  fifty  per  cent,  of  the  total  is  overstock,  is 
demonstrated  by  what  follows.  After  the  inauguration  of 
the  impending  crisis,  fifty  per  cent,  of  the  stock  is  sold  at 
auction,  at  less  than  half  the  original  cost.  The  original 
producers  in  this  case  sold  this  overstock  at  a  profit,  and 
declared  and  distributed  dividends  on  overstock  as  well  as 
stock  sold,  as  the  result.  Half  the  dividends  were,  perhaps, 
fairly  earned,  and  could  be  declared  as  such ;  the  remainder 
were  in  excess  of  actual  commerce.  The  former  came  from 
substantial  movements  in  the  market  of  consumers  ;  the  lat- 
ter from  speculative  movements  in  the  market  of  producers. 
The  corporations  declaring  these  dividends  are,  as  I  will  fur- 
ther assume,  engaged  in  the  manufacture  of  cloth.  In  the 
next  place,  we  will  suppose  there  are  two  corporations  en- 
gaged in  the  manufacture  of  railroad  iron.  Dividends  to  the 
amount  of  ten  thousand  dollars  are  declared  at  the  same 
time  upon  net  profits :  these  arise,  one  half  from  sales  to 
railroad  contractors,  who  receive  in  payment  for  completed 
railroad  track  and  equipments  two  thirds  of  the  contract 
price  in  debentures  of  the  railroad,  and  one  third  in  cash ; 
the  other  half  from  sales  to  replace  iron  on  a  road  earning 
a  fair  income.  To  pay  in  part  for  the  iron  and  for  labor 
on  the  new  road,  money  is  borrowed  from  banks,  and  the 
debentures  are  sold  to  those  who  pay  fifty  per  cent,  of  the 


524 


POLITICAL  ECONOMY. 


price  out  of  corporation  dividends  declared  in  part  by  means 
of  sales  of  overstock  in  the  shape  of  cloth  of  the  kind  before 
mentioned,  and  the  remaining  fifty  per  cent,  out  of  dividends 
declared  by  banks  from  profits  by  way  of  interest  and  dis- 
count, arising  from  the  loans  to  those  who  have  borrowed 
from  banks  to  furnish  some  of  the  "  cash  means  "  required 
to  pay  the  very  laborers  employed  in  constructing  the  rail- 
road. To  build  additional  warehouses,  stores,  shops  and 
dwelling-houses,  required  for  the  increasing  business  result- 
ing from  sales  of  overstock,  and  to  furnish  building  materials 
to  erect  them,  large  sums  in  shape  of  the  same  kind  of  profits 
are  employed  ;  and  to  make  municipal  improvements,  cor- 
responding in  kind  with  the  former,  money  is  borrowed  in 
part  out  of  the  same  fund  at  high  rates  of  interest,  and  ex- 
pended at  enormous  prices  in  improving  towns  and  cities 
away  from  the  country,  and  in  the  purchase  of  land.  So  far 
as  these  results  are  sustained  by  sales  of  overstock  in  a  con- 
sumer's market,  made  before,  or  as  soon  as  the  results  are 
accomplished,  the  movements  resulting  from  the  use  of  the 
credit  fund  are  substantial ;  so  far  as  they  are  not,  the 
movements  are  speculative,  whether  the  operators  know  it 
or  not.  The  taxes  levied  to  pay  the  interest  upon  the  sums 
borrowed  to  make  municipal  improvements  at  costly  rates, 
are  in  part  paid  for  out  of  the  credit  fund,  and  when  that 
fails,  out  of  the  substantial  production  which  supplies  con- 
sumers' markets  only. 

The  average  credit  fund  which  supplies  a  considerable 
part  of  the  taxes,  tariffs,  wages,  interest  and  profits  of  the 
tax  consumers,  laborers,  banks  and  capitalists  of  the  United 
States,  a  few  years  before  a  crisis  is  inaugurated,  and  for  a 
short  period  afterwards,  is  supplied  entirely  by  borrowing. 
There  is  no  real  loanable  capital  in  the  case :  it  is  an  enor- 
mous system  of  guarantied  production  on  credit,  reaching  in 
its  cause  and  in  its  effects  to  every  part  of  the  country. 
The  reason  why  writers  upon  money  and  exchange  have  not 
found  out  this  cause  is  because  they  have  not  analyzed  suffi- 
ciently ;  they  have  not  studied  the  development  of  production 
through  money  as  a  conventional  system ;  they  have,  it  is 


PRODUCTION  ON  CREDIT. 


525 


true,  examined  the  subject  deductively, —  Mr.  Mill  and  others 
declaring  in  substance  that  political  economy  must  be  inves- 
tigated in  this  way,  —  but  they  have  begun  with  secondary, 
which  are  only  the  effects  of  primary  causes.  The  mercan- 
tile credit,  which  is  supposed  by  Mr.  Mill  to  be  the  cause  of 
every  commercial  crisis,  is  only  the  final  effect  which  results 
from  the  active  cause.  Wherever  money  appears  it  is  uni- 
versally accredited  with  the  right  to  value,  purchase  and  pay, 
for  everything  on  sale  ;  the  preceding  chapters  show  what  is 
the  general  effect.  Money  exchanges  aside,  and  exchanges  of 
merchandise  only  regarded,  mercantile  credit  on  an  extensive 
scale  is  the  result  of  a  crisis.  Manufacturers,  merchants, 
railroad  builders,  and  speculators  owe  the  banks  for  their 
own  support  and  that  of  laborers  who  have  received  nom- 
inally high  wages  paid  for  with  bank-notes  which  have 
moved  many  times  out  of  deposits,  and  back  again  as  many ; 
the  slight  difference  in  volume  of  the  two  streams  being  the 
principal  fact  which  rendered  so  much  production  on  credit 
possible.  All  these  debtors  are  debtors  to  the  banks  and  to 
those  who  have  received  dividends,  interest  and  profits,  in 
consequence  of  bank  loans ;  but  before  they  can  pay  their 
debts,  they  must  exchange  the  results  of  their  labor  with 
those  who  have  cash  to  pay  for  it.  The  manufacturer  and 
merchant  must  sell  their  overstock  to  the  producers  of  the 
absolute  necessaries  of  life,  or  those  who  have  already  ex- 
changed with  the  latter :  the  owners  of  railroad  debentures 
must  offer  them  at  figures  much  below  cost,  or  wait  without 
interest  until  the  roads  become  more  productive ;  the  over- 
taxed city  or  town  must  levy  taxes  entirely  upon  the  produc- 
tion destined  for  a  consumer's  market,  that  destined  for  a 
producer's  market,  which  caused  the  infliction  of  the  present 
rate  of  taxation  having  vanished ;  or,  if  bankrupt,  wait  until 
it  is  able  to  pay. 

The  use  of  money  in  place  of  one  of  the  articles  bartered 
naturally  succeeded  to  barter,  because  it  was  developed  out 
of  barter.  If  society  were  still  in  the  undeveloped  state 
which  barter  implies,  there  could  be  no  danger  of  commer- 
cial crises  which  result  from  a  credit  caused  only  by  the  ex- 


526 


POLITICAL  ECONOMY. 


cessive  and  unregulated  use  of  money.  If  the  laborers  who 
produced  the  results  which  led  to  a  crisis  could  not  have 
been  fed,  the  results  would  not  have  appeared  at  the  time 
and  in  the  manner  they  did,  and  the  debts  to  the  banks  for 
the  money  exchanges  which  furnished  the  necessaries  of  life 
to  the  laborers,  and  the  resulting  debt  to  the  necessaries  of 
life  due  by  merchandise  not  consumed,  for  merchandise  con- 
sumed, would  not  have  been  incurred.  Reasoning  from  such 
results  as  though  they  constituted  of  themselves  the  active 
and  primary  cause  is  like  the  reasoning  of  the  famous  Dr. 
Cullen  as  to  the  origin  of  fevers.  Because  medical  science 
in  his  day  had  not  traced  the  morbid  results  back  to  their 
primary  causes,  he  attributed  fevers  to  a  diminished  energy 
of  the  brain.  The  theory  was  better  than  none,  but  it  was 
defective,  because  the  premises,  like  those  of  writers  upon 
political  economy,  contained  only  a  part  of  the  truth. 

In  like  manner,  the  theory  which  refers  all  the  phenomena 
of  a  commercial  crisis  to  the  failure  of  mercantile  credit  is 
inadequate  to  the  full  explanation  of  any  of  the  phenomena. 
The  use  of  a  general  buying  power  and  not  a  credit  power 
is  the  cause,  and  therefore  one  of  the  phenomena  must  nec- 
essarily be  a  movement  in  recurring  cycles  of  production  and 
prices  on  a  grand  and  general  scale,  and  such  all  experience 
shows  to  be  the  fact.  So  far  as  advancing  production  is  not 
balanced  and  liquidated  by  the  cash  demands  of  a  consum- 
er's market,  or  by  its  results  becoming  themselves  productive 
sooner  or  later,  the  movement  is  wholly  speculative,  what- 
ever its  character,  and  one  of  the  results  is  loss.  Banks 
have  no  loanable  capital  in  deposits.  They  loan  money  un- 
doubtedly, but  it  is  not  their  own,  and  their  liability  first  and 
last  is  that  of  guarantors  to  their  depositors.  Because  their 
loans  are  in  excess  of  all  the  exchanges  for  labor,  merchan- 
dise and  all  other  capital  which  their  depositors  were  entitled 
to  or  could  make  with  their  money  had  they  never  depos- 
ited, the  banks  loan  no  capital  but  their  own,  and  the  loans 
of  conventional  capital  in  the  shape  of  money  deposited 
which  their  customers  borrow,  being  in  excess  of  its  natural 
and  conventional  use  through  depositors,  can  only  be  used  in 


PRODUCTION  ON  CREDIT. 


527 


unproductive  consumption  or  production  on  credit.  While, 
therefore,  banks  do  not  deal  in  their  own  debt  or  credit, 
but  in  all  the  additional  circulation  of  money  which  they 
can  cause  through  loans,  over  and  above  that  which  the 
owners  can  give  it  themselves,  they  become  guarantors  of 
depositors  through  bank  capital.  When  they  thus  become 
guarantors  their  customers  who  borrow  become  guarantors 
to  them.  This  is  the  kind  of  credit  which  in  the  guise  of 
money  raises  general  prices,  and  thus  gives  the  appearance 
of  profit  to  unregulated  production  on  credit :  the  greater 
the  total  volume  of  money,  the  higher  must  be  the  range  of 
prices  caused  by  bank  loans  when  in  the  rising  scale.  If  the 
money  consists  of  inconvertible  paper  like  our  present  legal- 
tenders  and  bank-notes,  there  is  no  method  of  retiring  it  but 
by  cancellation,  burning,  or  locking  it  up  where  it  cannot  be 
put  in  circulation.  Under  a  metallic  or  convertible  currency, 
the  contraction  takes  place  by  shipment  or  hoarding  of  the 
metal,  or  both ;  but  this  safeguard  does  not  exist  under  an 
inconvertible  currency.  Had  deposit  loans  in  the  United 
States  been  impossible  at  all  times  since  1861,  prices  would 
not  have  risen  much  above  those  which  prevailed  prior  to 
that  time  with  deposit  loans  and  a  volume  of  currency  less 
by  one  half  than  that  which  is  now  outstanding. 

The  effect  of  deposit  loans  in  raising  prices  under  an  in- 
convertible currency  was  not  understood  by  the  government 
nor  by  the  people.  I  estimated  the  effect  of  the  general 
expansion  through  deposits  when  in  the  rising  scale,  added 
to  the  natural  circulation  to  be  equivalent  in  its  effect 
on  prices  to  an  issue  of  thirteen  hundred  millions  of  paper 
without  deposits,  in  a  pamphlet  published  in  the  spring  of 
1873 ;  but  this  estimate  was  too  low.  Probably  eighteen 
hundred  millions  of  bank  and  government  paper  would  not, 
under  a  system  like  that  of  France,  have  carried  prices  to  as 
high  a  point  as  they  actually  reached  in  the  United  States. 
The  effect  of  production  on  credit,  expanded  by  the  aid  of 
bank  loans  in  raising  prices  until  a  crisis  comes,  which  checks 
production  and  circulation  at  the  same  time,  is  worse  than 
that  of  mere  overproduction  considered  by  itself.  Tax- 


528 


POLITICAL  ECONOMY. 


ation  resulting  from  money  borrowed  and  expended  by- 
cities,  towns  and  counties,  when  prices  are  highest,  is  one  of 
the  heaviest  burdens  resulting  from  such  a  state  of  currency 
and  circulation.  The  debts  which  require  such  taxation 
cannot  be  wiped  out  by  bankruptcy,  while  individual  indebt- 
edness can.  Individual  gains  and  losses  are  fairly  balanced, 
but  there  is  no  compensation  by  set-off  for  such  taxation. 
The  indebtedness  requiring  it  must  be  paid  by  economy. 

DISTRIBUTION  AND  CONSUMPTION  ON  CREDIT. 

The  losses  arising  from  large  issues  of  bank  paper,  as  in 
England  after  the  passage  of  the  act  for  the  suspension  of 
payments  by  the  bank  in  1797,  and  in  the  United  States 
by  the  issues  of  treasury  and  bank  notes  after  the  com- 
mencement of  the  civil  war  in  1861,  were  largely  increased, 
as  we  have  seen,  by  bank  loans.  England  lost  largely  by 
being  compelled  to  purchase  gold  in  the  open  market  to  send 
abroad  to  pay  her  troops  and  furnish  subsidies  to  her  allies, 
and  she  was  compelled  to  pay  dearly  for  all  the  supplies  she 
purchased.  The  latter  may  be  said  of  the  United  States. 
But  the  losses  accruing  in  the  United  States  in  this  way  are 
small  compared  with  those  indirectly  resulting  from  the 
bankruptcies  of  individuals  and  increased  local  taxation. 
The  active  cause  was  the  efficiency  given  to  the  power  of 
loaning  money  through  deposit  and  discount  banking,  al- 
ready sufficiently  explained.  The  greater  the  volume  of 
money  put  in  circulation  by  the  purchase  of  labor,  the 
greater  must  be  the  resulting  losses,  when  loans  contract, 
as  the  natural  result  of  their  former  expansion.  In  the 
future,  therefore,  the  United  States  might  receive  some 
benefit  by  gradually  reducing  the  circulation  of  bank  and 
government  notes,  and  substituting  very  slowly  a  metallic 
circulation  in  their  place,  should  the  maintenance  of  a  fixed 
ratio  of  banking  reserve  be  found  impracticable.  The  re- 
sulting benefit  would  be  a  contraction  in  the  range  of  varia- 
tion in  prices,  but  not  in  the  ratio  of  variation.  The  latter 
must  always  be  the  same  wherever  there  is  any  variation 
at  all,  and  there  always  must  be  variation,  even  under  a 


PRODUCTION  ON  CREDIT. 


529 


currency  like  that  of  France.  This  was  well  illustrated 
in  Chapter  V.,  by  the  inscribed  polygons.  Taking  a  poly- 
gon of  forty  sides  to  illustrate  the  production  of  relative, 
while  the  containing  circle  represents  that  of  absolute  nec- 
essaries for  France,  and  a  polygon  of  eight  sides  to  illus- 
trate the  production  of  relative  necessaries  for  England, 
—  the  containing  circle  representing  that  of  absolute  nec- 
essaries, —  the  ratio  between  any  two  sides  of  the  French 
is  the  same  as  that  between  any  two  sides  (ratio  of  variation 
in  prices)  of  the  English  polygon,  but  the  length  of  any  one 
of  the  latter  (limit  in  time  and  range  of  variation  in  prices) 
is  approximately  eight  times  as  great  as  that  of  any  one  of 
the  former,  while  it  is  only  a  little  more  than  one  half  that 
of  the  United  States,  whose  production  is  represented  by  a 
polygon  the  sides  of  which  are  lengthened  to  and  become 
those  of  an  inscribed  square. 

By  resorting  to  a  metallic  currency,  however,  while  still 
retaining  deposit  and  discount  banking,  without  any  limit- 
ation' of  loans  by  reserve,  the  United  States  would  have  no 
reason  to  hope  that  banking,  commercial,  and  industrial 
crises  would  be  avoided,  any  more  than  they  have  been  by 
Great  Britain.  The  only  resulting  benefit  would  be  in  the 
limitation  of  period  and  range  of  advancing  prices.  The 
advantages  which  might  be  supposed  to  arise  in  this  manner 
to  the  producers  of  relative  necessaries,  whatever  they  might 
be,  would  be  small  compared  with  what  is  claimed  by  the 
buUionists,  both  here  and  in  Great  Britain.  The  question 
of  protection  is  really  no  longer  a  practical  one,  if  looked 
upon  in  a  correct  light.  A  greater  degree  of  patience,  time, 
and  care  is  demanded  in  the  production  of  some  grades  of 
goods ;  but  the  United  States  have  now  arrived,  as  produ- 
cers of  relative  necessaries,  at  that  point  where  the  first  and 
most  important  kind  of  protection  they  require  is  a  currency, 
which,  keeping  loans  and  therefore  prices  steady  by  a  steady 
ratio  of  reserve,  will  not  allow  them  to  lose  the  advantages 
to  which  the  skill  of  their  workmen,  and  the  capital  of  their 
producers  entitle  them.  If,  on  return  to  convertibihty,  such 
a  ratio  of  banking  reserve  could  be  maintained  everywhere, 

34 


530 


POLITICAL  ECONOMY. 


in  all  banks  in  the  United  States,  discriminating  tariffs 
would  cease  to  operate  alternately  as  a  tax  and  a  bounty, 
in  respect  to  many  important  branches  of  production,  and 
the  total  tax  collected  by  way  of  tariff  would,  to  a  great  ex- 
tent, fall  upon  that  kind  of  merchandise  which  would  pro- 
duce the  most  revenue.  A  simplification  of  the  laws  relat- 
ing to  importations  to  the  highest  degree  possible  ;  the  utmost 
freedom  of  commerce  practicable,  subject  to  the  collection  of 
the  necessary  revenue ;  coinage,  by  all  governments,  while 
still  retaining  the  present  names  of  coins,  upon  such  a  prin- 
ciple (by  adding  or  taking  away  a  little  metal)  that  every 
coin  would  show  upon  its  face,  in  addition  to  its  own  local 
name,  that  of  one  metallic  unit,  or  a  decimal  multiple  or  di- 
visor of  it,  —  for  which  purpose  the  dollar  of  the  United 
States  would  be  the  most  suitable,  because  the  unit  of  a 
perfect  decimal  system;  remonetization  of  silver,  by  all  the 
leading  nations,  and  regulation  of  bank  loans  by  banking 
reserve,  are  the  matters  to  which  the  United  States  ought  to 
apply  themselves  in  the  future.  Silver  cannot  be  remonetized 
in  any  effective  sense  by  limited  coinage.  What  is  needed 
is,  to  remonetize  silver  fully  everywhere ;  to  fix  the  barter 
rates  between  gold  and  silver  at  a  point  which  will  give  very 
nearly  the  average  rates,  if  left  to  themselves,  with  the  right 
to  store  silver  with  governments,  if  holders  are  willing  to 
trust  them,  —  the  governments  issuing  certificates  therefor. 
An  issue  by  the  United  States  of  token  silver  in  excess  of 
actual  wants  for  subsidiary  purposes  would  be  worse  than 
useless  ;  it  would  be  a  monetary  nuisance  :  to  establish  free 
coinage  for  themselves  alone  at  the  barter  rate  or  ratio  be- 
tween metals,  of  16  and  1,  would  probably  send  away  all  the 
gold.  In  order  to  realize  the  full  benefit  of  silver  in  the 
circulation,  all  nations  must  unite  and  fix  the  barter  rate 
between  silver  and  gold,  so  that  both  will  be  equally  distrib- 
uted. The  production  of  silver  is  an  industry  which  ought 
not  to  be  allowed  to  fall  off,  because  the  barter  exchange 
rates  can  be  fixed  between  silver  and  gold  without  any  diffi- 
culty, in  case  of  the  universal  establishment  of  free  coinage 
for  both  silver  and  gold  everywhere,  at  a  ratio  probably  not 


PRODUCTION  ON  CREDIT. 


531 


far  from  15  to  1.  If  fourteen  fifteenths  of  the  silver  metal 
to  be  coined  in  that  case,  together  with  all  that  previously 
coined,  could  be  given  away  by  a  general  distribution  with- 
out disturbing  the  ratio  ;  or  if  fourteen  fifteenths  of  it  could 
be  stored,  and  the  remainder  coined,  without  danger  of  coun- 
terfeits, —  governments  buying  and  coining  all  metal  offered, 
—  it  would  be  well ;  but  neither  of  these  plans  is  available. 
General  remonetization  is  desirable,  in  order  to  maintain  in 
the  steadiest  degree  possible  the  compound  ratio  of  total  an- 
nual metallic  production  in  the  shape  of  silver  and  gold  to 
total  metallic  product  in  the  shape  of  coin,  and  also  in  the 
shape  of  metallic  manufactured  commodities,  as  evenly  as 
possible.  To  abandon  the  free  coinage  of  silver  perpetually 
in  the  United  States  and  Europe  would  gradually  raise  the 
value  of  gold  as  coin,  by  raising  its  barter  rate  with  silver, 
unless  the  extension  of  banking  more  than  compensates  for 
the  rise.  It  would  thus,  as  it  is  now  doing,  by  cheapening 
silver,  throw  more  of  it  into  manufacture.  But  the  cheap- 
ening of  silver  must  in  the  end  diminish  seriously  its  annual 
production,  raise  gold  relatively  still  more  in  barter  rate, 
and  ultimately  in  purchasing  power.  No  rise  in  gold,  how- 
ever, to  the  injury  of  anybody,  can  occur,  because  its  produc- 
tion will  be  stimulated  as  that  of  silver  is  depressed,  and  no 
sudden  demonetizations  are  possible.  Still,  in  the  long  run, 
the  true  policy  will  be  to  maintain  the  most  perfect  equilib- 
rium possible  in  a  monetary  point  of  view;  to  avoid  the 
objections  to  weight  by  deposit,  and  not  to  allow  the  pro- 
duction of  either  metal  to  fall  off,  not  only  on  grounds  of 
monetary,  but  also  industrial,  policy ;  but  the  United  States 
must  wait  until  other  nations  are  ready.  Nothing  can  be 
gained,  either  by  the  limited  or  by  the  free  coinage  of  silver, 
in  the  way  of  prices,  by  the  United  States  acting  alone ;  and 
free  coinage  to  an  amount  sufficient  to  inaugurate  and  to 
maintain  convertibility,  admitting  its  possibility,  would  re- 
quire a  long  time.  It  would  probably  raise  the  price  of  the 
metal  so  much  before  convertibility  could  be  reached,  that 
individuals  would  stop  sending  it  to  the  mint,  and  the  gen- 
eral government  would  be  compelled  to  buy  metal  and  coin 


532 


POLITICAL  ECONOMY. 


for  itself.  This  would  cost  more  than  to  contract  and  re- 
tire a  sufficient  volume  of  treasury  notes,  and  accumulate  a 
sufficient  stock  of  gold.  With  convertibility  established, 
and  a  due  ratio  of  banking  reserve  maintained,  not  only 
production  on  credit,  but  also  distribution  and  consumption 
on  credit,  would  be  thenceforth  brought  to  a  minimum. 

Distribution  on  credit  has  been  already  referred  to,  but 
not  sufficiently  described.  It  occurs,  as  already  shown,  when 
a  merchant  (who  is  a  producer),  standing  between  the  first 
producer  and  a  consumer,  buys  overstock  by  the  aid  of  a 
bank  loan  from  the  first  producer.  Consumption  on  credit, 
by  producers  and  their  laborers,  which  leaves  a  tangible  re- 
sult behind,  is  all  that  consumption  which  results  directly 
from  production  on  credit,  before  any  part  of  the  overstock 
is  sold  ;  but  if  interest  and  discount  are  taken  on  account  of 
those  bank  loans,  which  cause  production  on  credit  and  over- 
stock that  will  not  sell,  and  the  banks  declare  and  pay  div- 
idends, founded  upon  such  production  and  overstock,  the 
receivers  of  these  dividends  and  all  others,  laborers  whose 
services  leave  no  tangible  result,  especially,  so  far  as  they 
buy  and  consume  absolute,  or  relative  necessaries  including 
luxuries,  by  the  aid  of  these  dividends,  are  not  only  unpro- 
ductive consumers,  but  to  a  great  extent  unproductive  con- 
sumers upon  .credit.  Under  a  circulation  like  that  of  France, 
the  consumption  of  one  who  lives  upon  his  own  money  re- 
ceipts, including  that  of  his  menial  servants  whose  consump- 
tion leaves  no  tangible  results,  is  not  consumption  upon 
credit,  because  it  is  balanced  by  the  productive  consumption 
demonstrated  to  have  already  taken  place,  by  the  payment 
to  him  of  the  money.  So  if  he  buys  silks  or  wines,  and 
consumes  them  unproductively,  the  consumption  is  balanced 
in  like  manner.  An  excess  of  such  consumption  would  show 
deficient  energy  of  production,  and  nothing  else.  The  only 
practical  line  in  the  United  States,  therefore,  between  the 
substantial  and  speculative  movements  resulting  from  pro- 
duction on  credit,  is  the  line  indicated  by  a  fixed  ratio  of 
metallic  reserve.  That  this  is  the  case,  ascending  prices, 
ascending  and  descending  production,  distribution  and  con- 


PRODUCTION  ON  CREDIT. 


533 


sumption,  and  the  ascending  and  descending  ratio  of  bank- 
ing reserve  to  bank  debt  and  to  bank  loans,  furnish  practical 
proof. 

M.  J.  B.  Say  proved  very  clearly  the  fallacy  of  Adam 
Smith's  theory  that  labor  is  the  measure  of  value,  and  the 
economists  of  the  United  States  have  followed  him  and  fur- 
nished additional  proof ;  but  by  still  adhering  to  the  theory 
of  the  intrinsic  value  of  gold  and  silver  coin  as  a  commod- 
ity, they  virtually  admit  Smith's  theory,  for  upon  no  other 
foundation  can  the  commodity  theory  of  money  be  sus- 
tained. Gold  coin  buys  wheat  or  iron  because  it  has  univer- 
sal value,  in  exchange  for  all  things,  wheat  and  iron  included. 
Its  value  is  conventional,  and  lies  only  in  what  it  exchanges 
for ;  and  this  is  an  average  which  can  only  be  stated  ab- 
stractly. It  can  only  value  as  a  unit,  and  purchasing  power 
must  be  in  proportion  to  the  number  of  units  employed. 
The  only  possible  practical  relation  between  gold  and  all 
other  things  is  that  of  units  alone,  aside  from  any  intrinsic 
qualities  in  the  metal;  and  so  of  silver.  The  barter  rela- 
tions between  gold  and  silver  ought  therefore  to  be  what 
we  actually  find  them  to  be,  namely,  such  as  arise  from  ac- 
tual weights  of  each  metal,  thrown  upon  the  market  with- 
out regard  to  the  intrinsic  qualities  of  either.  The  greater 
relative  abundance  of  silver  has  caused  a  much  greater  rela- 
tive weight  of  it  than  the  present  ratios  would  indicate,  to 
be  manufactured ;  but  the  fact  to  be  noted  is,  that  the  only 
barter  relation  between  the  two  metals,  heretofore  of  al- 
most universal  use  as  money  in  the  commercial  world,  is  by 
weights  of  respective  masses  :  there  is  no  other  barter  re- 
lation, because  these  metals  are,  and  for  ages  have  been, 
used  as  material  for  money,  and  there  are  vast  accumulations 
of  metallic  money  as  well  as  commodity ;  because  no  other 
relation  between  them  as  money  and  all  other  things,  is  pos- 
sible or  conceivable,  except  that  of  units ;  and  because  such 
use  and  such  relation  render  any  other  kind  of  barter  rate 
but  that  of  relative  weight  impossible.  If  the  intrinsic  quali- 
ties of  gold  and  silver  were  always  taken  into  account  when 
they  are  used  as  money,  they  could  never  be  used  as  such. 


534 


POLITICAL  ECONOMY. 


They  would  then  be  ordinary  commodities,  estimated  by  their 
intrinsic  qualities  as  well  as  their  respective  quantities,  when 
exchanged  for  other  things ;  the  intrinsic  qualities,  together 
with  respective  weights,  would  be  considered,  and  the  esti- 
mate of  these  relations  would  be  made  in  macoutes,  or  ab- 
stract units  having  name  but  not  locality,  except  in  the  two 
commodities  exchanged.  The  metals  would  thus  cease  al- 
together to  exist  as  money.  That  gold  as  well  as  silver, 
whether  weighed  out  by  miners,  by  merchants,  or  by  gov- 
ernments, has  no  possible  or  conceivable  relation  to  all  other 
commodities  but  that  of  units  —  excluding  its  intrinsic  quali- 
ties —  is  demonstrated  by  the  barter  rates  between  silver 
and  gold  as  commodities  in  the  commercial  world's  market 
in  London.  As  silver  for  the  market  increases  through  pro- 
duction or  demonetization,  its  barter  rate  with  gold  goes 
down  and  that  of  gold  goes  up,  but  this  has  no  immediate 
effect  upon  its  purchasing  power  when  used  as  a  unit  of 
money.  The  impression  of  the  commercial  world  —  it  might 
be  said  of  nearly  the  whole  world  —  is,  that  free  monetiza- 
tion  of  silver  by  the  United  States  will  raise  prices  in  the 
United  States  and  thereby  cheat  creditors  to  the  extent  of 
the  whole  or  a  part  of  the  present  difference  of  barter  rates 
between  gold  and  silver,  but  this  does  not  necessarily  follow. 
If  they  cheat  their  creditors  a  little,  they  must  first  cheat 
themselves  still  more.  The  entire  exclusion  of  gold  by  free 
coinage  of  silver  at  a  rate  not  sufficient  to  make  the  bullion 
in  a  silver  worth  the  bullion  in  a  gold  dollar,  would  create 
undoubtedly  an  arbitrary  premium  in  favor  of  foreign  bills 
to  some  extent,  and  a  real  difference  as  to  bills  not  drawn 
against  ordinary  merchandise.  Nothing  can  be  further  from 
the  truth,  however,  than  the  idea  that  barter  rates  between 
the  metals  will  settle  the  question,  because  it  is  impossible  for 
monetization  or  demonetization  to  carry  the  metal  now  exist- 
ing in  the  shape  of  silver  coin  immediately  out  of  use,  unless 
some  substitute  can  be  found  ;  and  what  substitute  is  there 
but  bank  or  government  paper  ?  How  could  Germany  and 
the  nations  of  the  Latin  Union  immediately  demonetize  the 
silver  coin  they  have  now  in  actual  circulation  ?    It  would 


PRODUCTION  ON  CREDIT. 


535 


be  impossible.  They  might  redeem  it  by  government  or 
bank  paper,  payable  in  gold,  within  a  short  time,  but  they 
could  not  redeem  it  at  once  in  gold.  For  this  purpose  time 
is  required,  and  the  needed  supply  of  gold  must  come  from 
production,  aided  by  a  diminishing  ratio  of  the  quantity  of 
that  metal,  and  an  increasing  ratio  of  that  of  silver  going 
into  manufacture,  with  an  increased  circulation  of  the  im- 
mense mass  of  gold  now  existing  in  a  coined  state.  The 
change  in  prices,  if  any  there  be,  will  not  be  noticed. 
Whatever  the  change  may  be,  it  must  take  place  very 
slowly,  and  I  have  shown  in  a  previous  chapter  that  because 
gold  and  silver  coin  is  but  a  series  of  units  and  the  barter 
rate  between  gold  and  silver  bullion  dependent  upon  relative 
weights  only,  there  are  probably  equal  values  of  gold  and 
silver,  that  is  to  say,  one  half  of  the  total  of  each,  in  the 
state  of  manufactured  commodity.  Money  is  a  science  which 
might  well  be  considered  by  itself  :  a  treatise  devoted  to  it 
exclusively  might  possibly  have  a  good  influence  in  turning 
the  attention  of  the  scientific  world  to  what  is  really  the 
foundation  of  all  civilization.  The  subject  of  production 
and  exchanges  of  commodities,  as  effected  through  money, 
is  of  so  complex  a  character  that  such  a  work,  devoted  to  the 
science  of  money  alone,  might  have  a  better  effect  than  one 
treating  it  in  connecticto  with  other  subjects. 

The  foundation  of  the  science  of  money,  as  I  have  shown 
in  Chapter  I.,  lies  in  the  fact  that  all  money  is  but  a  series 
of  units,  and  therefore  purchasing  power  must  be  in  propor- 
tion to  the  total  number  in  existence  and  the  amount  put  in 
circulation  by  loans  or  otherwise.  This  proposition  is  for  all 
practical  purposes  as  true  as  the  proposition  that  the  square 
of  the  hypothenuse  of  a  right-angled  triangle  is  equal  to  the 
sum  of  the  squares  of  the  two  sides.  All  things  are  bartered 
for  each  other,  when  bartered  at  all,  in  pursuance  of  a  val- 
uation made  in  reference  to  intrinsic  qualities  and  relative 
quantities,  as  estimated  by  the  parties  who  barter,  with  the 
exception  of  gold  and  silver.  These  are  estimated  without 
any  reference  to  their  intrinsic  qualities,  and  only  with  ref- 
erence to  relative  numbers  of  coined  units.   All  other  metals 


536 


POLITICAL  ECONOMY. 


are  valued  in  reference  to  intrinsic  qualities  as  well  a^  relative 
quantities.  Copper  and  iron  are  valued  in  this  manner.  An 
increased  production  of  copper  or  of  iron  tells^  immediately 
upon  the  price  everywhere.  The  relative  values  of  these 
metals  are  not  determined  as  well  by  the  relative  quantities 
of  each  existing  as  coin  and  in  a  manufactured  state  as  by 
the  quantities  thrown  upon  the  market,  while  the  prices  of 
gold  and  silver  are.  Gold  and  silver  are  in  demand,  first  of 
all,  for  the  purpose  of  being  used  as  money :  this  use  con- 
trols all  other  uses,  and  consists  in  employing  them  as  units 
of  valuation,  purchase,  and  payment,  in  producing  and  ex- 
changing commodities.  If  the  intrinsic  qualities  of  gold 
were  always  estimated  whenever  two  double  eagles  were  ex- 
changed for  a  ton  of  bar  iron,  two  hundred  pounds  of  cop- 
per, or  five  hundred  yards  of  cotton  cloth,  as  those  of  the 
iron,  copper,  and  cloth  are,  then  the  exchange  would  be  bar- 
ter, and  not  a  purchase  of  iron,  copper,  or  cloth.  But  this 
is  not  the  case  :  the  money  consists  of  forty  units  of  valuing, 
purchasing,  and  paying  power,  precisely  as  if  forty  dollars 
in  bank-notes  or  a  check  were  used  to  make  the  purchases. 
No  other  relation  between  the  money  and  the  goods  being 
either  possible  or  conceivable,  the  barter  relation  between 
the  metals  out  of  which  the  units  are  made  must  necessarily 
be  one  of  relative  weight  only  ;  for  if  there  were  any  other, 
it  would  appear  in  the  relations  of  utility  between  the  double 
eagles  and  the  iron  or  cloth,  and  then  the  exchange  of  these 
would  become  in  point  of  fact  what  writers  upon  money 
now  erroneously  call  barter.  The  barter  relation  between 
the  metals  is,  to  an  absolute  certainty,  one  of  relative 
weights  only,  and  hence  it  is  certain  that  the  units  of  either 
metal  must  value  in  proportion  to  respective  weights  of  the 
masses  actually  in  the  state  of  coin,  ready  and  waiting  to  be 
used  as  coin,  and  actually  used  in  that  character. 

It  is  utterly  impossible,  therefore,  that  any  important  rise 
should  take  place  immediately  in  the  purchasing  power  of 
gold,  or  fall  in  the  purchasing  power  of  silver,  in  consequence 
of  the  late  demonetizations  of  silver  in  Europe,  or  the  pos- 
sibly total  or  partial  remonetization  of  silver  in  the  United 


PRODUCTION  ON  CREDIT. 


537 


States.  Neither  gold  nor  silver  can  constitute  a  single 
standard,  nor  can  the  two  metals  together  constitute  a 
double  standard  in  point  of  true  science.  All  that  can  be 
said  for  a  single  standard  is,  that  unless  all  nations  will  com- 
bine to  allow  silver  to  be  coined  freely,  at  some  ratio  ap- 
proximating the  true  barter  rate  between  the  metals,  there 
is  a  standard  uncertainty  whether  any  one  nation  can  by 
coining  alone  hit  the  true  barter  rate  in  the  world's  market. 
Of  this  it  must  take  the  risk,  if  it  acts  alone,  in  addition  to 
the  inconvenience  it  would  thus  cause.  Moreover,  it  is  better 
for  the  United  States  to  abstain  from  the  coinage  of  silver 
until  all  nations  learn  the  lesson  that  general  recoinage  is 
desirable,  —  and  it  may  require  some  time  to  learn  it.  The 
departure  of  gold,  if  silver  is  overvalued,  will  leave  an  arbi- 
trary rate  of  exchange  not  dependent  upon  actual  values  to 
be  credited  to  outgoing  merchandise,  which  the  United  States 
must  pay  if  they  buy  bills  ;  and  they  must  allow  every  cred- 
itor, when  they  pay  him  silver,  this  difference  in  exchange, 
for  they  cannot  afford  to  do  otherwise.  Nothing  has  so 
clearly  proved  the  necessity  of  some  attempt  to  put  the 
science  of  money  on  true  ground,  as  the  opinions  expressed, 
not  in  Congress  only  (for  Congress  cannot  be  expected  to 
be  in  advance  of  the  scientific,  the  banking,  and  the  com- 
mercial world  in  this  regard),  but  everywhere,  in  respect  to 
the  remonetization  of  silver.  The  United  States  have  a 
perfect  and  sovereign  right  to  remonetize  silver,  but  they 
cannot  afford  to  allow  any  creditor  to  suffer  the  loss  of  the 
one  hundredth  of  one  per  cent,  in  consequence.  They  are 
bound  to  pay  according  to  the  equitable  tenor  of  their  bond 
which  is  a  current  security  in  the  world's  markets.  The 
citizens  who  pay  taxes  can  save  nothing  by  paying  in  sil- 
ver, while,  on  the  whole,  the  nation  will  loose.  The  char- 
acter of  metallic  money  is  such  as  I  have  shown  it  to  be  in 
a  true  scientific  sense.  Its  office  in  banking  reserve  is  one 
of  limitation  of  loans,  and  thereby  of  prices,  interest,  and 
taxes.  As  often  as  money  is  paid  out  to  purchase  either  the 
absolute  or  the  relative  necessaries  of  life  from  A.,  he  has  the 
resulting  conventional  right  to  purchase  for  himself,  when  he 


538 


POLITICAL  ECONOMY. 


desires,  or  to  lend,  and  there  can  be  no  blocking  of  the  ex- 
changes of  the  products  of  labor  in  consequence  to  any  seri- 
ous extent ;  but  when  it  is  lent  beyond  these  limits,  regu- 
lation of  some  kind  is  demanded.  The  mistake  made  by 
writers  upon  money  is,  not  that  credit  is  in  some  way  the 
cause  of  banking  crises,  but  in  not  having  hitherto  arrived 
at  the  knowledge  of  the  fact,  that  what  they  call  credit 
consists  in  the  use  of  the  conventional  process  of  money, 
through  banking,  without  the  necessary  limitations.  The 
true  nature  of  money  once  understood,  statutes  of  usury 
would  everywhere  be  repealed.  Where  the  possession  of 
money  results  from  actual  exchanges  of  commodities,  the 
lender  merely  receives  a  stipulated  rate  of  profit  for  giving 
up  to  the  borrower  the  right  to  purchase  commodities  result- 
ing from  his  having  himself  sold  them,  either  actually  or 
representatively,  or  labor  of  equal  value ;  but  when  a  bank 
loans  at  a  rate  fixed  by  law,  the  law  in  reality  merely  fixes 
the  rate  of  profit  which  shall  be  paid  by  the  borrower  for 
the  use  of  the  purchasing  power,  which  enables  him  to  still 
further  consume  and  produce  on  credit,  and  the  premium 
which  the  bank  shall  charge  for  the  risk  of  its  own  capital, 
standing  as  the  guaranty  of  its  depositors  against  imme- 
diate loss,  —  the  capital,  stock  and  overstock  of  the  pro- 
ducer and  the  capital  of  the  bank  being  the  total  security 
upon  which  the  guaranty  ultimately  stands.  In  prosperous 
times  the  rate  of  profit ;  on  the  approach  of  a  crisis,  the 
risk  of  loss,  is  the  chief  element ;  but  at  all  times  the  two 
together  constitute  bank  interest.  Why  should  this  rate  of 
profit,  and  this  risk  be  fixed  by  law  ?  It  is  the  logical  result 
of  the  old  mercantile  theory  of  money.  If  the  new  theory 
of  money,  which  I  have  furnished  in  the  foregoing  pages, 
were  adopted,  not  merely  as  a  set  of  abstract  propositions, 
but  the  true  basis  of  all  practical  reforms  in  currency  and 
loans,  by  scientists,  bankers,  merchants,  statesmen  and  poli- 
ticians, the  result  would  prove  to  every  practical  man  that 
the  true  oflfice  of  a  banking  reserve  is,  by  limiting  loans,  to 
limit  the  support  and  maintenance  of  producers,  laborers, 
and  adventurers,  by  the  base  line  of  the  absolute  necessa- 


PRODUCTION  ON  CREDIT. 


539 


ries  of  life ;  that  the  true  object  in  continuing  to  use  the  pre- 
cious metals  in  the  future,  as  always  in  the  past,  is  the  result- 
ing steadiness  of  loans  and  of  prices,  where  they  either  fur- 
nish the  whole  circulation,  or  efficiently  limit  a  paper  one, 
—  the  latter  of  which  they  have  never  yet  done  perfectly, 
even  under  sound  banks  of  issue  without  the  functions  of 
deposit  and  discount.  It  would  then  appear  that  the  per- 
sistence of  national  habits,  the  large  accumulations  of  both 
silver  and  gold  in  the  shape  of  money  and  manufactured 
commodity,  and  the  importance  of  mining  for  both  these 
metals  as  a  great  and  useful  industry  in  respect  to  arts  and 
manufactures,  as  well  as  steadiness  in  prices,  furnish  good 
reasons  for  the  general  remonetization  of  silver  as  soon  as  all 
nations  are  willing  to  unite  for  that  purpose,  fixing  the  bar- 
ter rate  between  silver  and  gold  as  nearly  as  possible  at  the 
average  which  would  appear  if  the  barter  rate  were  left  to 
regulate  itself  without  treaty  and  without  legislation.  Un- 
doubtedly there  would  be  a  large  amount  of  silver  mining 
were  the  barter  rate,  for  purposes  of  coinage,  fixed  at  20 
and  1.  Were  gold  and  silver  not  in  general  use  as  money, 
this  barter  rate  could  not  be  fixed  by  legislation  ;  the  barter 
rate,  for  instance,  between  copper  and  iron,  were  these  met- 
als bartered  at  all,  could  not  be  so  fixed  ;  but  short  of  the 
limit  which  would  carry  all  the  gold  on  the  one  hand  or  all 
the  silver  on  the  other,  into  arts  and  manufactures,  because 
it  would  be  worth  most  for  that  purpose,  treaties  and  laws 
regulating  universal  coinage  can  be  made.  The  natural  aver- 
age barter  rate,  as  nearly  as  possible,  ought  to  be  adopted, 
because  mining  industry  ought  to  be  left  to  itself,  in  order 
to  insure  the  fullest  possible  metallic  supply  for  monetary 
purposes ;  to  make  up  for  defective  production  of  either  metal 
by  greater  production  of  the  other,  and  in  order  to  maintain 
in  the  state  of  manufactured  commodity  one  half  in  value  of 
the  total  product  of  each  metal,  which  I  have  shown  to  be 
the  natural  consequence  of  full  and  free  production,  and  coin- 
age at  average  barter  rates  of  both  metals.  The  present 
ratios  of  metallic  distribution  among  the  different  nations  of 
the  commercial  world  ought  not  to  be,  and  indeed  cannot  be, 


640 


POLITICAL  ECONOMY. 


suddenly  disturbed.  Should  France  gradually  (and  she  can 
do  it  in  no  other  way)  adopt  the  banking  system,  metallic 
reserve  in  the  United  States  and  Great  Britain  ought  to  be 
gradually  increased.  Gold  and  silver  being  the  money  of 
the  commercial  world,  all  nations  should  act  together  upon 
all  questions  affecting  the  production  and  use  of  these  metals. 
One  of  the  logical  results  of  my  theory  of  money  is  the  stor- 
age with  governments  of  both  metals,  under  proper  regula- 
tions as  to  quantities  deposited  at  any  one  time  in  the  shape 
of  bullion,  to  be  circulated  by  means  of  certificates,  for  the 
convenience  of  bankers  and  merchants,  in  all  the  larger 
transactions  of  commerce.  Gold  and  silver  will  continue  to 
be  used,  nevertheless,  actually  as  well  as  representatively, 
and  must  in  every  country  form  a  part  of  the  circulation, 
where  there  is  an  efficient  metallic  regulation  of  loans  by 
banking  reserve.  If  there  is  not  such  efficient  limitation,  the 
metal  will  remain  in  hoard  as  in  1856-7  in  the  United 
States.  Paper  will  always  circulate  instead  of  metal  where 
there  is  enough  of  it  to  answer  all  the  actual  needs  of  cir- 
culation :  it  ought,  as  Adam  Smith  has  remarked,  to  come  a 
little  short  of  supplying  those  needs.  To  this  remark  I  add, 
that  it  ought,  on  short  averages,  to  form  a  definite  portion  of 
all  the  circulation,  either  actually  or  representatively,  and 
such,  from  the  facts  stated  by  Smith,  whose  testimony  ought 
to  be  admitted  without  question,  must  have  been  the  case  in 
Scotland  in  his  time.  Subject  to  the  necessity  of  having  a 
metallic  circulation  to  this  extent,  the  aim  should  be  not  only 
to  retain  all  the  conveniences  of  a  paper  circulation,  but  to 
extend  them  by  checks,  certificates,  and  clearings.  The  larger 
transactions  of  commerce  can  be  carried  on,  so  far  as  metal 
is  actually  called  for,  by  government  certificates  founded  on 
assayed  and  deposited  bullion ;  the  mercantile  idea  of  in- 
trinsic value  represented  to  some  extent  by  hoarding,  ought, 
however,  to  be  recognized  by  the  actual  presence  of  gold  and 
silver  as  a  substantial  part  of  the  circulation.  It  ought  not, 
however,  to  be  all  allowed  to  remain  in  hoard  as  in  1856-7  ; 
it  ought  to  be  partially  forced  into  circulation  with  the  paper, 
by  means  of  a  regulated  metallic  reserve  for  both  the  paper 


PRODUCTION  ON  CREDIT. 


541 


and  deposits.  Had  there  been  such  a  reserve  in  1856-7,  and 
previously,  the  one  hundred  millions  of  gold,  which  were 
nearly  all  the  time  hoarded,  would  have  been  forced  into  cir- 
culation, as  the  result  of  the  regulation  of  reserve;  and  there 
would  have  been  no  banking  crisis ;  not  because  the  gold  cir- 
culated, but  because  the  reserve  was  regulated. 

Regulate  deposits,  and  you  regulate  circulation ;  regu- 
late circulation,  and  you  regulate  deposits.  It  is  utterly 
impossible  for  any  substantial  difference  to  exist  between 
the  circulation  of  money,  which  causes  the  exchange  of  com- 
modities and  pays  for  labor  where  there  are  no  banks  what- 
ever, and  the  money,  which  performs  the  same  functions 
where  there  are  banks.  It  is  equally  impossible,  where  there 
are  banks,  for  one  kind  of  money  to  be  paid  out  of  banking 
reserve  to  buy  labor,  daily  bread,  clothing,  fuel,  and  other 
necessaries,  and  for  substantially  another  kind  to  be  used  by 
the  aid  of  debit  and  credit,  in  bank  and  bank  clearings,  to 
make  purchases  at  wholesale. 

The  supposition  of  any  difference,  if  my  theory  of  money 
be  admitted  to  be  true,  involves  an  absurdity.  A  regulated 
reserve  would  also  have  a  beneficial  effect  upon  the  purchases 
of  the  absolute  necessaries  of  life  from  the  producer.  In- 
stead of  buying  up  at  one  time  all  the  wheat  grown  in  any 
one  season,  paying  interest  upon  the  loans  and  speculating 
upon  the  price  from  day  to  day,  it  would  be  sent  to  and  not 
withheld  from  market,  for  purposes  of  speculation.  On  long 
averages,  the  price  of  wheat  is  comparatively  steady ;  on  short 
averages,  unsteady ;  and  this  unsteadiness  is,  in  the  United 
States,  aggravated  to  the  injury  of  the  whole  country  by 
speculative  purchases,  made  possible  through  bank  loans. 
It  is  a  mistake  to  suppose  that  the  countries  offering  a  mar- 
ket for  surplus  grain  settle  the  price :  sellers  as  well  as  buy- 
ers have  the  right  to  be  heard,  and  both  make  bargains  for 
the  sale  of  wheat  as  of  all  other  things.  Quantities,  of 
course,  determine  prices  in  the  end,  wants  remaining  the 
same  ;  but  as  the  crop  of  wheat  is  for  the  most  part  and  upon 
the  average  annually  consumed,  the  surplus  of  one  year  ought 
to  supply  the  deficiency  of  another.    With  steady  prices,  a 


642 


POLITICAL  ECONOMY. 


large  surplus^  could  not  be  put  upon  the  market  at  one 
time :  there  would  not  be  money  enough  to  be  loaned  to  buy 
and  hold  it.  It  would,  therefore,  remain  where  it  ought  to 
be,  —  in  first  hands,  —  and  not  crowded  upon  the  market, 
and  prices  maintained  by  the  aid  of  bank  loans.  The  whole 
country  (in  the  United  States)  has  suffered  by  wheat  hav- 
ing been  kept  for  a  few  months  out  of  the  foreign  markets  of 
consumers,  through  speculators  who  buy  by  the  aid  of  bank 
loans.  The  market  would  be  vastly  steadier  if  less  wheat 
were  purchased  and  held  on  speculation,  by  the  aid  of  such 
loans,  and  more  of  it  brought,  at  an  earlier  period,  into 
a  foreign  consumer's  market.  Low  prices  resulting  from 
heavy  crops  would  then  produce  their  appropriate  and  de- 
sirable effects  :  they  would  keep  a  considerable  portion 
where  it  ought  to  be,  in  first  hands,  until  brought  into  the 
next  season's  market  to  make  up  for  any  deficiency.  Prices 
would  in  this  way  be  steadier  than  they  are  now.  The  reg- 
ular dealers  would  then  find  uncertainty  enough  in  prices, 
but  on  the  whole  they  would  do  an  altogether  legitimate 
and  regular,  instead  of  a  speculative,  business.  More  real 
profit  would  also  result  to  sound  dealers,  and  thereby  to  the 
country  at  large,  while  merely  speculative  dealers  would  be 
forced  into  some  other  employment. 

A  still  greater  benefit  would  result  to  the  country  at  large 
by  the  regulation  of  dealings  in  the  market  of  stocks  and 
securities.  The  natural  tendencies  to  inequality  in  the  dis- 
tribution of  wealth,  while  most  desirable  in  themselves,  be- 
cause without  them  society  would  present  one  dead  level 
of  equality,  and  there  could  be  no  progress  because  there 
would  be  no  accumulations  of  capital,  are  strong  enough 
without  the  artificial  stimulus  of  bank  loans.  Stock  spec- 
ulations, as  we  know  them  in  the  United  States,  would  be 
impossible  with  a  duly  regulated  banking  reserve.  Capital 
invested  in  railroads  by  the  numerous  stockholders  who  have 
toiled  to  accumulate  the  sums  invested,  has  changed  hands 
in  vast  sums,  through  speculations  sustained  by  bank  loans. 
Doubtless,  some  of  the  largest  fortunes  in  the  United  States 
have  been  accumulated  out  of  smaller  fortunes  lost  in  this 


PRODUCTION  ON  CREDIT. 


543 


way ;  and  the  morality  of  the  time  finds  no  fault.  Indeed,  it 
is  estopped  from  fault-finding,  because  business  of  all  kinds 
is,  for  the  most  part,  conducted  upon  the  same  principle.  Is 
not  business  to  a  great  extent  in  the  United  States  a  lottery  ? 
Can  it  be  anything  but  a  lottery  when  producers  and  adven- 
turers of  all  kinds  can,  by  the  aid  of  bank  loans,  support 
themselves  and  their  employees  in  producing  at  high  prices  so 
much  merchandise,  which  must  ultimately  sell  at  low  prices, 
or  so  many  results  which  will  not  pay  cost  ?  Great  energy 
with  want  of  harmony  of  prodaction  ;  social  disorganization 
through  the  scattering  of  the  laborers  who  have  caused  the 
inharmonious  production  ;  great  poverty  and  great  wealth  in 
individuals,  are  at  this  time  the  grand  facts  which  appear  in 
the  social  condition  of  the  people  of  the  United  States. 

PRACTICAL  REMARKS  ADAPTED  TO  THE  PRESENT  CONDI- 
TION OF  THE  UNITED  STATES. 

The  idea  which  lies  at  the  root  of  what  is  called  com- 
munism is,  that  the  natural  inequalities  of  condition  in  point 
of  wealth  ought  to  be  rectified  by  the  adoption  of  some  sys- 
tem which  will  create  and  maintain  a  more  equal  distribution, 
and  various  plans  to  this  effect  have  been  suggested  in  the 
abstract.  In  France,  the  idea  is  the  legitimate  result  of 
causes,  which,  though  antedating  "the  Revolution,  have  not 
yet  ceased  -to  operate.  So  far  as  the  monetary  system  of 
France  can  have  any  influence,  it  is  the  best  practical  refuta- 
tion possible  of  the  idea ;  for  how  could  the  production  of 
France  be  materially  increased  ;  and  how  could  a  more  equi- 
table distribution  of  capital  be  not  only  made,  but  maintained  ? 
It  would  be  impossible  to  sustain  the  labor  of  civilized  com- 
munities without  those  accumulations  of  capital  which  nat- 
urally result  from  differences  between  those  who  produce. 
To  this  natural  extent  accumulations  are  indispensable,  not 
only  to  society,  but  the  maintenance  of  labor  itself  in  the 
manner  in  which  it  is  now  maintained  in  civilized  countries. 
Without  these  accumulations  there  would  have  been  neither 
laborer,  producer,  or  capitalist :  all  would  have  been  savages. 
There  are  no  political  causes,  however,  for  the  existence  of 


544 


POLITICAL  ECONOMY. 


the  idea  in  the  United  States  ;  so  far  as  it  exists  at  all,  we 
must  look  to  social  causes,  and  we  find  them  in  that  excessive 
production  on  credit  which  has  called  so  many  laborers  to  the 
shop,  the  town  and  the  city,  and  at  last  set  many  of  them 
adrift,  because  they  could  be  supported  in  that  kind  of  pro- 
duction no  longer.  The  frightful  excesses  of  communism  in 
the  destruction  of  railroad  property  in  the  United  States  can 
be  traced  to  no  other  cause. 

In  France,  then,  we  may  say  that  the  idea  has  a  political, 
in  the  United  States,  a  social,  foundation.  Its  existence  in 
the  latter  country  to  the  extent  shown  of  late,  was  certainly 
a  source  of  surprise  to  the  civilized  world.  The  nature  of 
men  must  be  essentially  changed  before  the  communistic  idea 
can  be  carried  out.  Nevertheless,  it  has  the  semblance  of 
support  in  the  artificial  augmentation  of  the  natural  inequal- 
ities before  referred  to,  and  in  the  very  existence  of  the  vast 
army  of  idle  laborers  who  have  been  driven  away  from  their 
old  occupations,  and  have  not  yet  found  new, .ones.  The 
idea  has,  of  course,  no  foundation  of  truth  or  justice  to  stand 
on  :  its  only  support  is  ^  fallacy  like  many  of  those  which 
have  been  unmasked  in  the  preceding  pages.  Both  labor 
and  capital  have  been  misled,  and  the  laborers  have  no  more 
fact  on  which  to  base  their  charges  against  capital  than  the 
partisans  of  an  irredeemable  paper  currency,  —  who,  not 
knowing  what  money  really  is,  clamor  for  more  itredeemable 
currency,  —  have  against  the  government  and  banks.  The 
true  remedy  of  labor  is  a  currency  which  will  not  make  those 
inequalities  of  accumulation  which  are  absolutely  indispen- 
sable to  civilization  so  great  as  to  interfere  with  and  even 
to  menace,  not  merely  the  well-being  of  labor,  but  the  main- 
tenance, upon  a  solid  foundation,  of  liberty  and  advancing 
civilization.  Steady  employment  will  cause  the  greatest  pos- 
sible amount  of  production  within  periods  of  twenty  years 
each  ;  steady  employment  can  only  be  secured  by  steady  pro- 
duction, and  steady  production  cannot  exist  without  com- 
paratively steady  prices  of  the  product.  These  are  practical 
truths.  If  the  theory  of  money  sustained  in  this  work  is 
true,  gold  and  silver,  or  one  of  these  metals,  is  essential  to 


PRODUCTION  ON  CEEDIT. 


545 


steadiness  of  production,  and  therefore  to  steadiness  of 
prices,  because  it  has  been  shown  that  the  vast  accumula- 
tions of  both  metals  throughout  the  commercial  world,  and 
the  constantly  diminishing  ratios  of  their  annual  produc- 
tion to  their  total  mass,  render  it  improbable  that  there 
will  ever  be  any  overproduction  of  them  as  compared  with 
the  increase  of  national  and  international  commerce,  even 
were  the  whole  product  coined,  while  the  fact  that  the 
market  will  keep,  at  the  present  prevailing  values  in  ex- 
change for  all  other  commodities,  one  third  of  the  total  of 
each  in  arts  and  manufactures,  and  the  certainty  that  the 
mercantile  idea  of  intrinsic  value  will  persist,  or  give  way 
very  slowly,  render  overproduction  in  fact  impossible :  arts 
and  manufactures  will  take  all  that  the  weakening  of  the 
mercantile  idea  can  ever  throw  upon  the  market,  while  the 
demonstration  I  have  so  amply  furnished,  that  all  money 
must  in  point  of  science  be  taken  out  of  the  category  of  ordi- 
nary commodities,  because  in  effect  but  a  conventional  sys- 
tem of  exchange  by  localized  units,  explains  why  overpro- 
duction is  impossible  until  the  ratio  of  annual  product  to 
existing  mass  of  the  two  metals  increases  very  greatly  be- 
yond anything  in  the  history  of  past  metallic  production. 
I  have  demonstrated  what  has  been  believed  by  the  com- 
mercial world  for  ages,  but  never  demonstrated  before, — 
that  metallic  money  is  essential  to  steadiness  of  prices  ;  first, 
as  money  in  general  circulation,  and  secondly,  as  a  limitation 
of  bank  loans,  both  in  banking  reserve  and  in  bank-note 
redemption  reserve.  Heretofore  it  has  been  called  a  basis. 
This  word  conveys  no  meaning  to  my  mind,  and  I  think 
it  has  no  definite  meaning  whatever.  The  true  office  of  a 
metallic  reserve  is  one  of  limitation  of  loans.  Adam  Smith 
had  no  idea  of  consumption  as  balancing  production,  and 
thereby,  as  the  only  paramount  and  controlling  force,  main- 
taining the  steadiness  of  circulation  even  of  gold  and  silver 
themselves.  He  looked  upon  gold  and  silver  money  in  the 
light  of  a  commodity  worth  the  labor  which  the  mining  of 
the  metal  cost,  and  that  as  commodities  they  would  main- 
tain a  steadiness  of  their  own,  under  all  circumstances,  as 

35 


546 


POLITICAL  ECONOMY. 


the  founders  of  the  Bank  of  England  supposed  some  sev- 
enty years  afterwards.  Nevertheless,  the  sagacity  of  this 
great  man  led  him  to  perceive  very  clearly  the  necessity  of 
maintaining  within  short  periods  an  even  average  of  reserve ; 
or,  as  I  have  usually  expressed  it  in  the  pages  of  this  book, 
a  definite  ratio  of  metallic  reserve  to  bank  debt ;  but  most 
of  the  modern  authorities  say  or  imply  that  a  bank  can- 
not and  ought  not  to  attempt  to  keep  such  a  reserve.  Now, 
the  difference  between  the  banks  of  issue  in  Smith's  time 
and  modern  banks  of  deposit  and  discount,  aside  from  note 
issues,  lies  only  in  the  form  of  the  debt.  There  is  economy 
of  metal  by  bank  notes  taking  its  place  in  the  former,  and 
by  the  use  of  a  consolidated  reserve  through  deposits,  in  the 
latter.  I  have  demonstrated  that  a  bank  of  deposit  and 
discount  deals  only  in  deposits  :  it  never  deals  in  its  own 
debt  as  does  a  bank  of  issue,  because  such  a  thing  is  im- 
possible. It  deals  in  no  other  form  of  bank  debt  but  bank- 
notes. Were  it  otherwise,  banking  reserve  could  have  no 
effect  whatever  in  limiting,  as  it  now  does,  the  range  of 
variation  in  prices,  by  putting  some  limit  to  bank  loans. 
That  limit  is  fixed  absolutely  by  the  condition  that  every 
bank  must  keep  reserve  enough,  either  in  its  own  vaults  or 
those  of  some  other  bank,  to  meet  every  call  made  upon  it : 
if  required  to  pay  over  its  counter  in  coin  or  bank-notes,  it 
must  do  so  ;  if  paying  in  the  shape  of  a  check  or  draft  upon 
some  other  bank,  the  bank  drawn  upon  must  pay  in  like 
manner.  As  a  rule  banks  keep  more  reserve  than  they 
need,  and  the  excess  having  only  an  indefinite  relation  to 
loans,  can  furnish  no  definite  limitation  of  them.  It  serves 
only  as  a  kind  of  ballast  to  counteract  the  increased  expan- 
sion of  prices  through  the  additional  expansion  of  circula- 
tion which  a  smaller  ratio  of  reserve  would  necessarily  im- 
ply, because  the  banks  would  not  be  likely  to  sell  their  gold 
to  bullion  dealers  or  ship  it  out  of  the  country  to  invest  in 
merchandise  or  bills.  Were  they  indeed  in  the  habit  of 
sending  it  abroad  for  this  purpose  and  so  investing  it,  using 
the  same  caution  in  respect  to  their  loans  at  home  as  if  the 
gold  shipped  were  still  in  their  vaults,  prices  at  home  would 


PRODUCTION  ON  CREDIT. 


547 


be  as  steady  or  as  unsteady  —  whichever  one  chooses  to  call 
them  —  in  the  one  case  as  in  the  other,  because  the  average 
of  loans  would  be  the  same  in  each  case.  The  range  of  vari- 
ation in  prices  depending  upon  two  elements  only,  —  the 
total  amount  of  money  which  can  be^  and  the  amount  of 
circulation  which  is  effected  by  that  total,  in  order  to  supply 
consumers'  markets,  —  the  variation  would  necessarily  be  the 
same  in  each  case,  because  there  is  no  difference  in  loans  at 
home.  Had  the  metal  shipped  remained  all  the  time  in  the 
reserve,  it  would  have  paid  no  debts  and  bought  no  mer- 
chandise, nor  would  it  have  purchased  labor  and  thereby 
have  enabled  the  seller  of  that  labor  —  the  laborer  —  to 
carry  the  range  of  all  prices  still  further  upward  by  putting 
more  money  into  his  hand,  and  thus  increasing  the  quan- 
tity of  money  paid  out,  while  the  quantity  of  things  actually 
bought  and  consumed  remained  the  same,  or  at  least  did  not 
increase  in  proportion. 

Banking  in  the  United  States,  then,  as  well  as  in  England, 
has  but  one  direct  relation  existing  between  its  reserve  and 
its  debt,  and  that  is,  the  necessity  of  meeting  every  call  upon 
that  reserve.  This  seems  to  be  a  very  slight  check  to  expan- 
sion :  there  must  be  some  other,  or  what  is  called  converti- 
bility is  little  less  than  a  sham.  What  can  that  other  check 
be  ?  It  is  the  check  furnished  by  the  necessity  of  redeeming 
bank-notes  in  coin,  in  the  United  States ;  and  in  England,  by 
the  fact  that  outstanding  circulation  has  its  limits  in  the 
coin  of  the  realm.  These  checks  are  insufficient,  but  without 
them  convertibility  of  bank  debt  by  book  would  be  but  a 
name.  The  depreciation  of  bank-notes,  issued  without  ref- 
erence to  actual  exchanges  in  the  United  States  is  to  some 
extent  counteracted  by  redemptions  in  coin  to  supply  the 
deposit  fund  of  country  banks  at  commercial  centres.  Adam 
Smith  is  referred  to  by  some  writers  as  authority  to  prove 
that  there  can  be  no  undue  expansion  of  prices  through  the 
issue  of  convertible  bank-notes  under  any  circumstances.  I 
now  bring  him  forward  after  the  lapse  of  more  than  one  hun- 
dred years  since  his  "  Wealth  of  Nations "  was  published 
(1776),  as  a  witness  to  disprove  not  only  this,  but  also  the 


548 


POLITICAL  ECONOMY 


popular  fallacy  that  excessive  issues  of  convertible  bank- 
notes, aside  from  deposit  loans,  cause  any  such  expansion  of 
circulation  and  of  prices  as  we  witness  in  our  time,  although 
it  must  be  confessed  they  cannot  furnish  as  steady  circulation, 
and,  therefore,  prices,  as  metallic  money  distributed  through 
national  and  international  commerce,  but  not  banked :  they 
approximate,  under  careful  management,  but  they  do  not 
reach  that  condition.  Smith  gives  no  reasons,  but  he  gives 
facts.  His  facts  show  that  a  bank  of  issue,  considered  inde- 
pendently of  deposit  loans,  must  stand  or  fall  by  itself ;  if  it 
falls  it  will  not  fall  because  all  other  banks  fall,  but  because 
under  such  banking  every  bank  has  to  stand  by  its  own 
strength  or  fall  by  its  own  weakness.  Smith  says,  on  page 
232,  fourth  London  edition,  by  Alexander  Murray,  that  tlie 
test  of  sound  banking  in  his  time  was  the  repayment  of  loans 
by  customers  within  short  periods  of  four,  five,  six,  or  eight 
months.  This,  he  says,  without  any  further  care  or  attention, 
kept  the  bank  coffers  replenished,  because  the  stream  run- 
ning into  them  was  equal  to  that  going  out;  but  where  the 
outward  stream  was  the  largest,  in  consequence  of  repay- 
ments falling  short  of  loans,  it  ''required  some  great  and  con- 
tinual effort  of  expense,"  to  prevent  those  coffers  from  being 
exhausted  altogether.  The  cause  of  this  difference  Smith 
does  not  in  terms  state,  but  his  testimony  to  the  fact  is  clear 
and  explicit.  The  true  reason  I  have  repeatedly  given  in 
the  course  of  this  work. 

In  the  first  case,  when  the  reserve  was  maintained  at  an 
average,  all  the  additional  production  which  the  loans  caused 
to  take  place  was  within  short  periods  balanced  by  sales  to 
consumers  ;  in  the  second,  when  it  was  not  so  maintained, 
the  production  was  of  such  a  character  that  cash  buyers 
could  not  be  found  fast  enough  to  keep  the  return  current 
into  the  reserve  equal  in  volume  to  the  outgoing  current, 
either  because  the  merchandise  produced  was  in  excess  of 
consumers'  markets,  or  because  the  product,  if  not  mer- 
chandise, had  not  yet  become  productive,  and  could  there- 
fore find  no  cash  buyer.  That  there  was  some  banking  of 
tbis  kind  in  Smith's  time  is  certain,  and  therefore  it  cannot 


PRODUCTION  ON  CREDIT. 


549 


be  said  with  truth  that  an  excess  of  bank-notes  is  impossi- 
ble, even  without  deposit  loans,  but  it  may  be  said  with 
entire  truth  that  such  excess  is  slight,  compared  with  the 
excess  of  our  time  under  deposit  loans,  because  under  the 
system  of  loans  of  bank-notes,  in  Smith's  time,  the  excess 
was  confined  to  a  few  banks,  and  soon  ruined  them  without 
affecting  the  ability  of  the  others  to  redeem ;  but  in  our  time, 
under  deposit  loans,  all  banks  .stand  until  a  general  banking 
crisis  compels  all  to  suspend.  While  the  cause  was  entirely 
local  and  confined  to  a  few  banks  in  Smith's  time,  in  ours  it 
is  national,  and  not  only  national  but  international.  No  just 
distinction  can  be  made  between  the  two  kinds  of  banking, 
nevertheless,  in  respect  to  maintaining  a  proper  relation  be- 
tween loans  and  reserve  in  all  banks.  There  is  no  difference 
in  the  purposes  which  loans  subserve,  whether  made  by  a 
bank  which  makes  only  deposit  loans,  or  a  bank  which  only 
issues  notes.  The  rigorously  exact  difference  is,  that  in 
order  to  make  the  loans  of  a  deposit-loan  bank  harmonize 
with  the  total  circulation  possible  without  such  banks,  at 
some  point  or  other,  loans  must  stop  after  a  certain  amount 
of  all  money  belonging  to  depositors  has  been  lent :  this 
leaves  a  definite  amount  of  reserve :  with  the  bank  of  issue 
the  reserve  must  always  bear  a  nearly  even  ratio  of  metal  to 
outstanding  notes,  agreeably  to  Smith's  law.  The  bank  of 
issue  deals  in  its  own  debt  as  well  as  in  the  metal  of  its 
reserve ;  the  deposit  loan  bank  deals  in  the  same  kind  of 
money  which  existed  before  such  a  bank  was  known :  it  deals 
in  both  metallic  and  paper  money,  and  in  nothing  else,  be- 
cause it  only  becomes  bankrupt  for  want  of  either  of  these  in 
order  to  meet  calls.  If  it  be  true  that  the  deposit-loan  bank 
has  introduced  a  new  kind  of  debt  in  which  it  deals,  that  debt 
takes  the  place  of  the  bank-note  pro  tanto^  and  goes  into  the 
equation  of  exchange  by  the  instrumentality  of  checks,  being 
placed  there  by  buyers,  and  not  by  banks.  The  latter  only 
register  the  changes  of  ownership.  Production  on  credit  is 
the  result  of  accumulated  capital,  and  without  it  civilization 
would  be  impossible  :  the  danger  lies  in  carrying  it  to  ex- 
cess.   Bank  loans  are,  to  the  extent  of  their  volume,  an  in- 


550 


POLITICAL  ECONOMY. 


crease  of  the  production  on  credit  which  would  be  possible 
without  them.  In  the  absence  of  all  banks,  the  production 
taking  place  by  means  of  ordinary  loans  from  capitalists 
would  be  on  credit,  undoubtedly,  because  the  capital  would 
be  borrowed  ;  but  banks  have  in  deposits,  no  capital  to  lend, 
because  their  loans  are  in  excess  of  those  which  depositors 
themselves  make.  The  loans  made  out  of  all  money  capital, 
other  than  that  of  depositors,  must  first  be  taken  into  consid- 
eration, and  then,  all  loans  by  banks  over  and  above  these, 
and  called  bank  loans,  are  so  much  in  addition  ;  and  under 
bank  management  in  our  time,  they  know  no  limit  but  a 
banking  crisis.  It  is  doubtful  whether  any  other  limit  is 
practicable,  and  it  is  certain  that  the  only  other  limit  is  a 
ratio  of  reserve  to  loans  varying  at  short  intervals.  That 
production  on  credit  is  the  source  of  bank  debt  or  deposits 
over  and  above  reserve,  is  true  beyond  reasonable  doubt. 
There  could  be  no  production  on  credit  were  it  not  for 
loans  ;  loans  are  its  only  source  and  origin.  Bank  loans, 
therefore,  must  add  by  their  exact  total  to  the  production 
on  credit  which  would  take  place  without  them.  Produc- 
tion of  commodities  is  the  origin  of  deposits,  and  not  the 
sale  of  commodities.  Bank  expansion  is  the  register  of  over- 
production on  bank  books,  as  "  overtrading  "  is  registered  on 
merchants'  books.  As  loans  are  made  from  time  to  time,  and 
bank-notes  or  coin  paid  to  labor,  the  notes  or  coin  are  to  a 
great  extent  redeposited,  leaving  the  reserve  nearly  of  the 
same  volume  as  it  was  before  the  loans  were  made,  while  re- 
deposit  increases  bank  debt  by  its  total  over  and  above  what 
it  was  before,  and  therefore  deposits.  Meantime,  sales  of 
merchandise  by  producers,  who  borrow  from  banks,  to  mer- 
chants, who  also  borrow  from  banks,  pay  the  debt  of  the 
former,  and  substitute  in  its  place  an  equal  amount,  with 
profits  and  charges  added.  The  latter  thus  increase  bank 
debt,  or,  in  other  words,  deposits.  Bank  expansion  is,  there- 
fore, composed  mostly  of  two  elements  :  wages  and  profits  : 
even  charges  are  largely  made  up  out  of  wages.  When  pro- 
duction on  credit,  and,  therefore,  bank  expansion,  have 
reached  their  limits,  they  are  largely  in  advance  of  outstand- 


PRODUCTION  ON  CREDIT. 


551 


ing  circulation.  While  that  has  increased,  they  have  in- 
creased much  more.  Thus,  while  circulation  in  the  United 
States  increased  during  the  three  years  between  1854  and 
1857  only  ten  millions,  deposits  increased  forty-two  millions. 
The  same  law  has  prevailed  in  England  as  well  since  as 
before  the  bank  act  of  1844.  In  February,  1824,  deposits 
had  increased  in  the  Bank  of  England  within  a  few  months 
more  than  two  millions;  but,  in  August,  1825,  they  had 
fallen  nearly  four  millions  within  five  months.  In  February, 
1836,  deposits  had  increased  nearly  three  and  a  half  millions 
within  one  year,  and  in  February,  1838,  they  had  fallen 
nearly  six  millions.  In  1846,  after  the  "circulation"  was 
either  metallic  or  limited  by  metal,  pound  for  pound,  with 
an  unimportant  exception,  private  deposits  increased  about 
nine  and  a  half  millions,  and  in  1847  they  had  fallen  nearly 
twelve  millions.  Expansion  was  thus  relatively  greater  with 
a  metallic  than  it  ever  had  been  with  a  simply  convertible 
currency.  The  lesson  taught  is  the  same  on  each  side  of  the 
Atlantic,  —  that  bank  expansion  is  everywhere  one  and  the 
same  thing.  It  is  not  the  power,  not  the  active  cause,  which 
brings  on  a  banking  crisis ;  it  is  the  banking  side  of  pro- 
duction on  credit,  as  shown  by  bank  books,  while  mercan- 
tile and  manufacturers'  books  show  the  other  side.  All  the 
banks,  and  the  merchants  and  manufacturers  who  borrow  of 
them,  are  partners  :  each  of  these  keeps  only  one  side  of  the 
accounts.  In  all  these  cases  the  rapid  bank  expansion  was 
the  result  of  the  rapid  accumulation  of  stocks  on  hand  which 
had  become  overstock,  and  the  impossibility  of  realizing  on 
those  wliieh  had  been  sold  outside  of  a  cash  market. 

The  equally  ra'pid  contraction  was  the  result  of  forced  sales 
after  the  banking  and  commercial  crisis,  —  the  natural  and 
necessary  result  of  overproduction, — had  been  inaugurated. 
The  parallel  between  bank  suspension  in  the  two  countries 
is  also,  in  point  of  science,  complete.  "  Suspension  of  specie 
payments  "  takes  place  in  the  United  States,  and  quiet  is  at 
once  restored,  because  it  is  known  that  the  banks  can  then 
accommodate  those  who  are  carrying  overstock  and  want  to 
be  saved  from  bankruptcy :  suspension  of  the  bank  act  of 
1844  has  a  like  effect  in  England. 


552 


POLITICAL  ECONOMY. 


The  "  purchasing  power  "  of  money  then  rises,  as  it  has 
risen  since  1873  in  the  United  States,  without  reference  to 
any  supposed  or  imaginary  contraction  of  "  legal  tenders " 
and  bank-notes.  The  real  contraction  is  always  and  every- 
where the  same :  it  is  not  the  contraction  of  money,  but  of 
production,  of  distribution  and  consumption,  of  wages  and 
profits.  When  these  contract,  they  necessarily  contract  that 
circulation  or  use  of  money,  the  expansion  of  which  (circu- 
lation, not  money)  had  previously  resulted  from^  but  had 
never  caused  the  expansion  of  production  to  take  place. 
While  resulting  from  the  expansion  of  production,  it  had  at 
the  same  time  concealed  its  real  effects  by  an  apparent  rise  of 
prices  when  there  was  a  real  fall  of  values.  The  merchant 
Tvho  sold,  as  well  as  the  one  who  bought,  on  a  rising  market, 
appeared  to  be  making  money,  and  really  made  it  as  long  as 
he  could  find  a  buyer  of  the  overstock,  who  could  borrow 
from  a  bank  and  pay  him  a  profit,  besides  taking  his  place  as 
a  debtor  to  the  same  or  some  other  bank.  No  matter  how 
much  prices  might  rise,  as  long  as  manufacturers  and  mer- 
chants could  sell  and  pay  their  debts  in  bank.  On  the  other 
hand,  as  the  receivers  of  profits  (aside  from  this  facility  of 
paying  debts)  they  lost,  as  well  as  the  receivers  of  wages. 
The  nominal  rise  of  these  could  hardly  balance  the  real  fall. 
Production  on  credit  carried  to  this  excess  cannot  be  a  bless- 
ing ;  it  is  surely  a  curse.  Could  it  be  properly  regulated,  it 
would,  on  the  other  hand,  be  the  surest  means  of  advancing 
all  the  nations  of  the  great  "  Anglo-Saxon  "  family.  The 
immediate  prospect  in  this  direction,  it  must  be  confessed, 
however,  is  poor.  Another  generation  of  writers  and  bankers 
will  probably  learn  the  true  science  of  the  subject,  complex 
as  it  undoubtedly  is. 

The  same  ideas  which  made  the  English  statesmen  who 
framed  the  act  of  1844  suppose  that  they  had  established  a 
sound  monetary  system  because  they  had  limited  bank-note 
circulation  by  metal,  that  a  bank  loan  is  something  essen- 
tially different  from  any  other  loan,  and  that  the  sum  of  ten 
pounds  in  the  shape  of  merely  convertible  or  even  inconverti- 
ble bank-notes  is  something  essentially  different  from  the 


PKODUCTION  01^  CREDIT. 


553 


same  sum  in  gold  sovereigns,  will,  for  a  time,  prevail,  and 
conceal  from  the  understanding  the  true  nature  of  money, 
and  render  it  impossible  to  make  the  scientific  and  bank- 
ing world  see,  with  all  the  force  of  demonstration,  why- 
gold  and  silver  furnish  the  only  money  possible  or  conceiv- 
able by  which,  at  this  time  and  for  a  long  time  in  the  future, 
harmony  of  production  can  be  maintained.  It  has  been  well 
said,  that  in  ordinary  minds,  associations  of  ideas,  if  firmly 
established,  become  indissoluble  ;  and  the  power  of  separat- 
ing them,  and  of  arranging  them  in  new  combinations,  is  one 
of  the  rarest  of  endowments.  These  remarks  are  preemi- 
nently true  in  reference  to  economical  and  monetary  ques- 
tions, which  all  men  are  required  to  face  continually.  If 
they  were  capable  of  escaping  from  the  slavery  of  associa- 
tions implied  in  the  expressions  —  Bank-notes  have  no  value 
because  they  are  mere  credits ;  Gold  and  silver  coin  are  com- 
modities and  have  mercantile  value  as  such  in  the  metal  they 
contain  while  still  money,  and  hence  they  are  an  end  in  them- 
selves, as  well  as  means  to  an  end,  they  would  soon  learn  the 
real  facts.  Until  men  are  able  to  master  these  fallacies  in 
sufficient  numbers  to  modify  opinion,  there  will  be  no  pos- 
sibility of  regulating  bank  reserve.  The  practical  evidence 
of  the  superiority  of  gold  and  silver  as  money,  however,  is 
so  strong  that  the  merits  of  a  monetary  system  like  that 
of  France  is  at  once  perceived.  Without  banks,  a  circula- 
tion of  seven  hundred  millions  of  coin,  and  two  or  three 
hundred  millions  of  treasury  notes,  could  be  maintained  ; 
but  it  would  be  impossible  to  establish  it  now,  and  if  it 
were  not,  labor  would  suffer  greatly  before  it  could  be 
accomplished.  If  there  were  really  such  a  thing  as  sound 
monetary  science,  how  could  the  Congress  of  the  United 
States  be  debating  the  question  of  issuing  silver  at  this  time 
and  paying  their  creditors  with  it?  To  coin  silver  at  the 
ratio  of  15^-  instead  of  16  to  1,  as  rapidly  as  possible,  and 
gradually  retire  the  present  surplus  of  two  hundred  millions 
of  legal  tenders,  commonly  called  greenbacks,  with  silver, 
while  still  requiring  all  customs  duties  to  be  paid  in  gold ; 
still  paying  the  interest  upon  the  public  debt  in  gold,  but  no 


554 


POLITICAL  ECONOMY. 


part  of  the  principal  until  after  the  establishment  of  "  specie 
payments,"  would  be  unobjectionable,  although  premature. 
Specie  payments  inaugurated,  the  silver  coined  at  15^  would 
immediatedly  be  on  a  par  with  and  exchangeable  for  gold,  as 
in  France.  But  to  coin  silver  even  at  a  lower  ratio  to  gold, 
by  one  half  pound  for  every  fifteen  and  a  half  pounds,  and 
force  creditors  to  receive  it  even  at  this  rate,  —  lower  as  it  is 
by  three  per  cent,  than  the  French  rate,  —  and  compel  credi- 
tors to  take  it  instead  of  gold,  is  repudiation,  of  which  the 
United  States  has  never  yet  been  guilty.  To  do  this  is  pre- 
cisely the  same  thing  in  substance  as  to  make  their  interest 
and  principal  payable  in  their  own  paper  money.  For  all 
practical  purposes  it  is  the  same  thing,  except  that  they  can, 
by  further  paper  issues,  depreciate  the  paper  still  more, 
while  the  coinage  of  silver  will  tend  to  raise  its  value  as 
bullion.  To  make  all  paper  money  convertible  as  soon  as 
possible,  is  the  true  policy.  "  Business  would  revive  "  im- 
mediately afterwards,  and  another  crisis  come  as  it  came  in 
England  in  1825.  We  must  continue  to  have  commercial 
crises  until  we  are  able  to  avert  or  essentially  modify  them 
by  learning  the  true  nature  of  money,  the  danger  of  over- 
production, and  the  advantages  possessed  by  gold  and  silver 
over  all  other  forms  of  money. 

The  only  sound  argument  in  favor  of  coining  silver  at 
15^  and  retiriEg  government  paper  with  it  as  rapidly  as  pos- 
sible is,  that  it  would  be  a  ready  method  of  retiring  a  con- 
siderable portion  of  government  paper,  which  is  a  necessary 
step  towards  convertibility.  In  other  respects  it  would  be 
premature. 


CHAPTER  XXXI. 


THE  PEESENT  INDUSTRIAL  CONDITION  OF  THE  UNITED 
STATES :  PLENTY  ^AND  SCAECITY  :  CAPITAL  AND  COM- 
MUNISM. 

This  subject  is  one  of  the  gravest  which  can  be  presented 
to  the  consideration  of  thinking  men.  That  large  numbers 
of  native  as  well  as  foreign-born  laborers  are  unemployed  is 
true.  That  they  would  not  take  employment  if  offered 
them  is  probably  true  of  some,  possibly  many  of  them  ;  but, 
if  so,  the  disinclination  to  labor  must  have  arisen  from  the 
possibility  of  getting  along  without  it,  which  has  been  grad- 
ually and  practically  demonstrated  to  them  by  the  fact  that 
they  have  succeeded  so  long  in  living  upon  the  community 
at  large. 

The  fact,  however,  remains,  that  they  labored  more  or 
less,  when  employment  was  to  be  had  freely ;  but  now,  when 
there  is  comparatively  little,  they  do  not  seek,  and  may 
sometimes  refuse  it.  Such  a  state  of  things,  leading,  as  it 
has  led,  to  an  emigration  of  skilled  laborers  to  a  foreign 
country,  demonstrates  to  a  certainty,  that  by  some  cause  or 
other,  not  a  comparatively  small  number,  as  prior  to  1857, 
but  a  comparatively  large  number,  have  been  called  by  some 
powerfully  exciting  cause  to  the  production  of  those  things 
or  results,  —  whichever  one  chooses  to  call  them,  —  which 
relate  solely  to  civilization  and  "  progress,"  and  not  to  the 
labor  which,  by  the  sweat  of  the  brow,  produces  the  ab- 
solute necessaries  of  life.  It  is  no  answer  to  say  that  crops 
have  been  abundant,  and  largely  exported.  It  is  immaterial 
where  the  labor  is  located  which  consumes  the  absolute 
necessaries  of  life,  while  it  does  not  produce  them,  whether 
it  is  at  home  or  beyond  seas.    The  commercial  world  is  but 


656 


POLITICAL  ECONOMY. 


one  country,  so  far  as  exchanges  between  producers  are 
concerned.  Tariffs  are  taxes  imposed  on  the  commodities 
of  certain  producers,  to  furnish  government  revenue.  They 
are  not  intended  to  operate  as  bounties  forever  to  home  pro- 
ducers, because  that  would  defeat  the  very  object  of  protec- 
tion, but  ultimately  to  enable  the  home  producer  to  com- 
mand the  field  as  to  the  commodity  protected,  independently 
of  all  aid.  Until  this  end  is  achieved,  the  object  aimed  at 
in  collecting  a  part  of  the  necessary  revenue  by  taxing  one 
commodity  which  may  be,  rather  than  another,  which  can- 
not be,  produced  at  home,  is  not  fully  accomplished.  The 
limits  within  which  such  a  purpose  can  be  made  effective  are 
narrow  enough,  because  the  artificial  advantage  created  for 
the  producer  is  to  a  considerable  degree  counteracted  by  the 
loss  of  power  to  buy,  on  the  part  of  the  producing  con- 
sumer. In  order  to  give  the  protected  producer  any  sub- 
stantial benefit,  it  is  absolutely  essential  to  give  him  at  the 
same  time  with  the  protection  of  a  tax  on  the  foreign  article, 
the  first  condition  of  protection  in  a  currency  of  steady  and 
uniform  purchasing  power.  This  the  American  producer 
and  the  American  laborer  have  never  had  ;  not  from  any 
fault  of  their  own,  or  anybody  else,  but  because  the  complex 
nature  of  money  and  its  exchanges  has  not  been  under- 
stood. 

With  steady  prices  it  would  be  reasonable  to  expect  that 
a  considerable  portion  of  the  exports  now  leaving  in  the 
shape  of  grain,  provisions,  and  cotton  which  has  cost  grain 
and  provisions,  would  remain  at  home  to  feed  and  clothe 
laborers  while  producing  more  of  the  same  kind  of  goods, 
which  are  now  imported.  But  it  is  said  that  we  have  an 
abundance,  and,  indeed,  a  surplus  of  everything,  including 
even  the  absolute  necessaries  of  life,  the  evidence  of  which 
is  the  fact  that  we  export  so  large  a  quantity.  The  fallacy 
in  this,  as  iuy  many  other  matters  relating  to  the  science  of 
production  and  exchange,  lies  in  the  want  of  a  careful  ex- 
amination of  all  the  facts,  which  in  this  case  give  us  a 
very  complex  matter  for  examination,  instead  of  the  simple 
one  of  the  export.    The  exchange  between  the  domestic 


INDUSTRIAL  CONDITION  OF  THE  UNITED  STATES.  557 

grower  of  wlieat  in  the  United  States  and  the  foreign  man- 
ufacturer of  iron  or  cloth,  through  the  intermediaries  of 
commerce,  and  by  virtue  of  a  sale  to  buyers  in  the  United 
States  with  domestic  money  in  the  shape  of  dollars,  and  re- 
sales in  England  for  British  currency  in  pounds  by  the  in- 
strumentality of  bills  of  exchange,  takes  place  like  all  other 
exchanges.  The  buyers  seek  the  markets  where  they  can 
get  such  goods  as  they  want,  and  at  the  lowest  rates.  If 
they  seek  goods  of  particular  qualities  in  fineness,  durability 
of  colors,  etc.,  and  cannot  find  them  at  home,  they  must,  in 
order  to  supply  the  market,  go  abroad.  In  view  of  the 
present  state  of  development  of  manufacturing  industr}^, 
there  is  really  no  question  about  protection  which  needs  to 
be  discussed  by  any  practical  man.  It  seems  probable  that 
with  a  currency  of  approximately  equal  possibilities  in  point 
of  steadiness  with  that  of  France,  and  with  steady  produc- 
ers to  use  it,  the  United  States  would  be  able  to  furnish 
themselves,  and,  to  a  considerable  extent,  foreign  markets, 
with  articles  now  largely  imported.  But  all  this  is  in  the 
future.  The  question  which  I  have  not  yet  answered  fully 
is,  whether  we  have  not,  in  an  economical  point  of  view,  a 
surplus  of  the  absolute  necessaries  of  life,  because  we  export 
a  large  surplus.  The  answer  to  this  question  will  be  fur- 
nished by  the  answer  to  the  question,  whether,  after  all  ex- 
changes are  made  between  producing  consumers  at  home 
and  abroad,  growing  out  of  all  the  production  of  the  United 
States  and  all  production  abroad,  a  surplus  of  any  kind  is  left, 
and  if  a  surplus  of  any  kind,  where.  There  certainly  is  no 
surplus  of  absolute  necessaries  in  the  shape  of  grain  and  pro- 
visions in  the  United  States  after  these  exchanges  are  made. 
There  has  been,  however,  a  large  surplus  of  cloth  and  of 
iron,  after  all  the  sales  the  producers  of  them  could  make, 
although  these  indispensable  articles  are  being  reduced  in 
stock.  The  same  is  true  of  many  other  articles  and  of 
houses  and  warehouses,  lumber  and  other  building  mate- 
rials, railroads,  and  municipal  improvements  proportioned 
to  these.  Here,  then,  is  where  the  surplus  lies  in  an  eco- 
nomical point  of  view ;  and  before  there  can  be  rectifica- 


558 


POLITICAL  ECONOMY. 


tion  of  the  exchanges,  this  surplus  must  be  reduced.  But 
before  a  surplus  can  be  reduced  to  equilibrium,  supply  in 
another  quarter  must  increase.  Depletion  must  occur  on 
one  side  half  way  and  repletion  half  way  on  the  other. 
This  will  enable  all  producers  to  support  themselves;  and 
the  sum  of  national  is  the  sum  of  all  individual  prosperity. 
There  are,  therefore,  but  two  remedies  possible  in  the  very 
nature  of  things  ;  first,  more  of  the  surplus  now  going  abroad 
must  be  used  to  feed  and  support  the  existing  body  of  Amer- 
ican laborers  in  supplying  by  their  labor  at  home  the  im- 
ported articles  which  can  be  produced  at  home,  or  secondly, 
by  sending  a  large  body  of  American  laborers  to  buy  or  rent 
farms,  and  thus  depleting  surplus  in  the  kind  of  necessaries 
they  have  been  producing,  and  repleting  where  there  has 
been  hitherto  defect.  But  neither  of  these  alternatives  will 
be  sufficient  of  itself.  Both  must  come  into  operation  to 
solve  the  problem  for  American  labor,  whose  skilled  work- 
men know  none  more  skilled  than  themselves.  These  co- 
factors  will  in  due  time  produce  their  proper  and  natural 
effect,  if  not  impeded  by  an  expanding  and  contracting  circu- 
lation of  money  ;  I  say  circulation  of  money,  instead  of  money 
itself,  because  contraction  of  money  is  a  mere  phantom  of  the 
imagination.  A  cause  is  known  in  its  effects.  The  effect 
of  money  used  is  the  exchange  of  things  produced.  Money 
is,  therefore,  but  a  process  of  exchanging  commodities  or 
services.  There  has  always  been  abundant  expansion  of 
money  in  the  sense  of  expansion  of  the  circulation  of  money, 
when  production  was  expanding,  and  there  has  always  been 
abundant  contraction  of  money,  in  the  sense  of  contraction 
of  the  circulation  of  money,  when  production  was  contract- 
ing. The  prices  of  manufactured  commodities  in  the  shape 
of  cloth,  of  iron,  of  lumber,  and  of  property  in  the  shape  of 
houses,  etc.,  have  been  much  contracted  within  a  few  years 
past,  although  units  of  money  are  as  abundant  as  ever,  and 
will  be  as  efficient  as  ever,  when  the  actors  in  the  grand 
drama  of  production  can,  through  the  restoration  of  equilib- 
rium in  the  exchanges,  use  them  again.  The  real  contrac- 
tion lies  in  production,  distribution  and  circulation.  To 


INDUSTRIAL  CONDITION  OF  THE  UNITED  STATES.  559 

cancel  three  hundred  millions  of  treasury  and  bank-notes 
would  produce  no  more  contraction  in  prices  than  we  have 
now  :  if  it  could,  it  would  be  unfortunate  indeed,  for  prices 
of  the  sort  named  have  surely  been  contracted  enough  al- 
ready. Instead  of  contracting  any  more,  they  must  and  will 
rise  and  continue  to  rise  after  convertibility  has  been  reached. 
The  real  object  to  be  gained  by  the  contraction  of  the  pres- 
ent volume  of  paper  currency  is  not  contraction  of  present 
prices,  but  the  retirement  of  a  sufficient  quantity  of  the 
paper  to  make  convertibility,  when  attempted,  a  success  ; 
and  such  a  contraction,  to  be  certainly  successful,  ought  to  be 
gradual.  Under  our  present  system  of  banking,  the  range 
of  variation  in  prices,  through  variation  in  production,  will 
be  less  with  convertible  notes  than  they  could  be  with  the 
present  volume  of  notes.  That  is  the  material  difference. 
The  real  contraction  which  is  now  going  on  in  the  United 
States  is  of  a  kind  which  comes  at  no  man's  bidding,  and 
ends  at  no  man's  command.  It  is  the  necessary  and  unavoid- 
able reaction  which  sets  in  to  restore  equilibrium  between 
the  production  and  exchange  of  commodities.  The  only  ap- 
parent contraction,  on  the  other  hand,  which  is  taking  place, 
even  to  the  eyes  of  the  scientific  observer,  is  in  the  quantity 
of  circulation.  Both  these  contractions  are  now  going  on  in 
the  United  States,  and  have  been  going  on  for  some  time, 
and  to  the  ordinary  observer  it  seems  to  be  a  contraction 
in  money  itself.  The  real  contraction,  looked  upon  in  the 
most  perfect  and  general  sense  possible,  is  a  contraction 
of  the  amount  of  labor  applied  within  short  averages  to  the 
manufacture  of  such  things  as  iron  and  cloth ;  a  still  greater 
contraction  in  the  amount  of  labor  applied  to  the  pro- 
duction of  building  materials,  houses  and  warehouses  ;  a 
still  greater  in  that  applied  to  the  making  of  municipal 
improvements,  and  greatest  of  all  to  that  which  is  applied 
to  personal  uses,  without  definite  and  tangible  results,  and 
to  purposes  of  speculation  only,  without  creating  any  act- 
ual value.  The  tremendous  banking,  commercial,  indus- 
trial and  speculative  crisis  of  1873,  has  made  a  familiar 
household  word  what  was  before  a,  word  of  only  occasional 


560 


POLITICAL  ECONOMY. 


use.  The  light  brigade  of  tramps  has  left  altogether  the 
grand  army  of  labor,  to  which,  before  1873,  they  had  com- 
paratively slight  attachment,  and  is  now  living  on  spoils. 
It  would  be  a  great  mistake  to  suppose  that  these  men  have 
never  labored  and  have  always  lived  as  they  are  now  living. 
They  have  banded  together  for  mutual  protection,  by  a  kind 
of  necessity.  Society  is  at  war  with  them  in  order  to  main- 
tain itself,  and  they  have  banded  together  in  self-defence. 
That  they  might  nearly  all  find  employment,  if  they  would 
disband  and  seek  it,  is  probable,  but  the  want  of  employ- 
ment, or  at  least  the  great  difficulty  of  finding  it,  has  set  them 
adrift.  They  were,  certainly,  — a  large  portion  of  them,  —  in 
the  country  before  1873,  for  nothing  has  occurred  since  to  at- 
tract them  here  from  abroad,  and  they  have  not  come  up  out 
of  the  sea,  nor  from  across  the  border.  What  were  they  doing 
before  1873?  They  must  either  have  been  emploj^ed  at  some 
occupation,  however  light,  supported  by  public  contributions 
in  public  institutions,  or  by  private  charity  in  the  cities  and 
large  towns  from  which  they  have  emigrated,  and  are  now 
roaming  at  large.  In  the  absence  of  all  official  or  reliable 
information  of  any  kind,  it  is  almost  certain  that  they  were 
once  located  for  the  most  part  in  cities  and  large  towns  ; 
many  of  them  were  occupied  at  some  employment  or  other, 
and,  so  far  as  they  were  skilled  laborers,  were  possessed  of 
less  skill  and  force  than  others,  and  therefore  emigrated, 
and  have  succeeded  in  obtaining  a  precarious  existence  with- 
out labor.  They  think  that  society  has  wronged  them,  and 
have  no  conception  of  the  real  and  ultimate  truth  in  the  case, 
—  that  neither  society  at  large  nor  capitalists  in  particular, 
have  wronged  them  :  that  their  real  misfortune  lies  in  the 
existence  of  those  conditions  for  which  society  and  capitalists 
are  no  more  to  blame  than  they  are.  They  are  ignorant  of 
the  truth  that  without  those  inequalities,  which  make  surplus 
capital  possible,  and  which  in  fact  consist  merely  of  surplus 
capital  here  and  there,  civilized  society  could  not  exist,  and 
skilled  workmen  would  be  barbarians  ;  that  the  fault  lies 
not  in  the  fact  of  surplus  capital,  but  in  the  vast  and 
unlimited  possibilities  of  "  credit,"  in  the  shape  not  of  an 


INDUSTRIAL  CONDITION  OF  THE  UNITED  STATES-  561 

extra  amount  of  money,  but  of  an  extra  circulation  of  money. 
The  popular  knowledge  of  the  exact  nature  of  this  credit  is 
embodied  in  the  common  remark,  even  of  writers,  that  such 
disturbances  arise  from  "  a  highly  artificial  state  of  credit." 
The  knowledge  which  this  expression  implies,  leads  to  no  so- 
lution of  the  vast  problem.  That  a  nation  so  young  as  the 
United  States  should  have  within  the  short  period  of  twelve 
years  developed  such  an  industrial  condition  as  now  appears, 
is  the  most  wonderful  of  all  social  facts.  It  is  a  condition 
which  gives  something  mare  than  a  warning  :  it  gives  abso- 
lute demonstration  of  the  immediate  necessity  of  change.  It 
demonstrates  the  existence  of  unsurpassed  energy  and  force, 
—  like  Polyphemus  in  the  fable,  strong,  but  blind,  —  and  not 
only  the  existence  of  these,  but  the  danger  of  them  when  mis- 
directed. It  demonstrates  the  necessity  of  balancing  produc- 
tive forces  by  a  proper  distribution ;  that  what  is  needed  now 
is  a  new  science  of  production  and  of  the  exchanges  of  com- 
merce as  affected  by  money,  founded  on  facts,  to  take  the 
place  of  old  abstract  theories  which  are  only  remotely  and 
subjectively  true.  Of  all  the  countries  in  the  world,  the 
United  States  stand  most  in  need  of  such  a  balance.  If 
France  and  the  United  States  could  change  places  as  to  their 
monetary  systems  and  as  to  nothing  else,  France  would  not 
follow  exactly  the  previous  example  of  the  United  States,  nor 
the  latter  that  of  France.  Manners,  habits,  modes  of  thought, 
and  previous  modes  of  action,  would  modify  the  actions  of 
each.  Money  is  but  means  to  an  end :  the  United  States 
would  carry  the  old  energy  into  the  use  of  the  new  monetary 
system,  and  France  would  carry  the  old  conservatism.  But 
the  new  monetary  system  of  the  United  States  would  force 
upon  them  the  making  of  a  balance  at  short  periods,  while 
the  new  monetary  system  of  France  would  postpone  the  bal- 
ance to  a  crisis  of  some  kind,  although  results  would  be  highly 
modified  by  the  character  and  habits  of  each  country. 

Suppose  the  United  States  to  have  inaugurated  convertibil- 
ity of  government  and  bank  debt  to-day.  Suppose  to-morrow, 
by  authority  of  law  and  consent  of  all  bankers,  depositors  are 
paid  off  by  bankers  to  the  extent  of  all  the  registered  or 


562 


POLITICAL  ECONOMY. 


inscribed  debt  they  owe  them,  by  issues  of  bank-notes,  — 
bankers  retaining  the  metallic  reserve  to  redeem  the  notes 
with.  Bankers  now  redeem  the  notes  that  are  presented  out 
of  a  reserve  which  must  be  in  harmony  with  outstanding 
circulation,  and  the  only  kind  of  loan  possible  is  a  loan  in 
bank-notes.  They  cannot  keep  out  many  more  notes  than 
will  circulate  in  even  ratio  with  their  metallic  reserves. 
Loans  of  notes  to  merchants  and  other  producers  are  now 
for  the  most  part  only  used  by  producers  and  laborers  them- 
selves, and  those  to  whom  they  pay  them  out  in  the  ordi- 
nary commercial  exchanges  before  they  are  redeemed,  while 
in  deposit  and  discount  banks,  the  same  notes  can  not  only 
be  loaned  for  this  purpose  once,  but  through  deposit  and  re- 
deposit,  before  being  redeemed  at  all,  supply  a  continual 
stream  of  outgoing  supplied  by  incoming  notes,  sufficient 
to  pile  up  a  large  additional  amount  of  production,  until 
checked  by  a  crisis. 

Now  that  depositors  have  by  supposition  been  paid  off  in 
bank-notes,  and  the  banks  converted  into  banks  of  issue, 
depositors  have,  as  a  whole,  the  same  amount  of  money, 
loan  as  much  of  it,  and  produce  the  same  effect  on  prices, 
as  before,  so  far  as  real  commercial  exchanges  go,  and  the 
borrowers  from  deposit-loan  banks,  who  gave  the  banks  their 
bills  and  notes  in  exchange  for  money  out  of  the  incoming 
stream  of  deposits,  before  the  conversion  took  place,  must 
continue  gradually  to  pay  up,  precisely  as  they  were  doing 
before.  They  will  pay  up  as  fast  as  they  sell  the  goods 
whose  production  was  the  result  of  their  bank  loans  out  of 
the  incoming  stream  of  deposits.  This  it  is  certain  they 
will  do,  and  they  can  do  no  more.  But  who  will  be  the 
buyers  ?  The  buyers  will  either  be  cash  buyers  who  have 
cash  of  their  own  received  by  them  as  sellers  in  the  markets 
of  producing  consumers,  who  have  exchanged  merchandise, 
or  buyers  who  borrow  the  money  from  the  new  banks  of 
issue.  But  these  banks  can  no  longer  loan  money  out  of 
the  incoming  stream  of  deposits,  because  there  is  no  longer 
such  a  stream.  All  they  can  do  is  to  lend  bank-notes  as 
fast  as  the  maintenance  of  an  even  average  of  reserve  will 


INDUSTRIAL  CONDITION  OF  THE  UNITED  STATES.  563 

allow,  like  the  Scotch  banks  in  Adam  Smith's  time,  with 
the' exception  of  the  unfortunate  Bank  of  Ayr,  which,  dis- 
regarding the  notice  of  a  failing  reserve,  became  bankrupt. 
This  self -regulating  limitation  of  loans  in  the  shape  of  notes, 
by  the  state  of  the  reserve,  will  prevent  any  possibility  of 
long  maintaining  the  old  volume  of  bank  loans.  They  will 
fall  away  as  fast  as  a  producing  consumer's  market  of  the 
kind  I  have  named  takes  away  the  goods  which  the  volume 
of  bank  loans  brought  into  existence,  by  enabling  so  much 
production  on  credit  in  advance  of  producing  consumers' 
markets,  to  take  place.  What  maintained  the  volume  of 
bank  loans  in  existence,  before  the  conversion,  was  the  rise 
in  prices  caused  by  the  increasing  volume  of  production  on 
credit.  The  registered  or  inscribed  bank  credits  in  favor 
of  depositors  have  become,  through  the  metamorphosis  of 
banks  of  deposit  and  discount  into  banks  of  issue,  bank-notes 
in  actual  possession,  and  have  not  vanished,  because  they 
are  a  part  of  the  currency  required  by  the  country.  Deposits 
with  the  reserve  behind  them,  belonged,  in  point  of  sound 
economical  science,  to  depositors,  because  they  were  actually 
so  much  money,  except  as  I  have  explained  in  previous 
chapters,  received  in  exchange  for  commodities  in  producing 
consumers'  markets  :  the  money  in  the  reserve,  through  the 
unlimited  circulation  which  could  be  given  it  out  of  the  in- 
coming stream,  made  all  the  deposits  of  this  character  the 
precise  equivalent  of  an  equal  amount  in  bank-notes  with 
the  aid  of  the  metallic  banking,  now  converted  into  a 
metallic  bank-note  redemption  reserve,  behind  them,  with, 
however,  a  vastly  important  difference  in  results.  That 
difference  I  have  already  described  with  such  precision  that 
it  can  be  clearly  understood.  I  attempted  to  explain  it  in 
an  essay  on  bank-note  circulation  and  central  redemption 
in  the  spring  of  1878,  but  the  subject  was  too  complex  for 
me  clearly  to  understand  it  myself  without  further  examina- 
tion, and  hence  I  could  not  offer  a  satisfactory  demonstration 
to  my  readers.  I  endeavored  to  point  out  what  I  have  just 
now  pointed  out,  —  the  vast  expansion  of  circulation  which 
can  be  produced  through  banks  of  discount  and  deposit  and 


564 


POLITICAL  ECONOMY. 


through  them  alone,  but  I  failed  in  giving  a  perfect  demon- 
stration, because  I  had  not  then  discovered  that  the  volume 
of  bank  loans  is  sustained  by  an  equal  volume  of  production. 
I  endeavored  to  show  that  the  range  of  expansion  must  be  in 
proportion  to  the  total  volume  of  money  in  circulation,  but 
failed,  because  I  had  not  carried  my  analysis  of  the  nature  of 
money  far  enough.  Now,  if  all  the  banks  of  deposit  and 
discount  in  the  United  States  —  the  grand  source  and  origin 
of  our  gigantic  system  of  production  on  credit  —  were,  upon 
the  restoration  of  metallic  payments,  converted  into  well 
regulated  banks  of  issue,  and  deposit  and  discount  banking 
abandoned,  sound  banking  could  alone  exist,  and  we  should 
have  an  approximation  to  the  French  monetary  system.^ 
If  deposit  and  discount  banking  continues,  the  only  mode  of 
of  regulating  it  is  in  approximating  as  nearly  as  possible  to 
the  French  system  by  artificially  regulating  what,  in  the 
Scotch  bank  system  of  Adam  Smith's  time,  naturally  regu- 
lated itself,  through  the  reserve.  The  reserve  is  that  money 
which  comes  into  banks  of  deposit  and  discount  from  actual 
exchanges  of  commodities  :  the  remainder  of  deposits  is  that 
which  comes  from  the  production  of  them.  It  is  not  con- 
vertible bank-notes  which  lead  to  production  on  credit  and 
a  state  of  things  called  a  commercial  crisis,  but  deposit  loans  ; 
for,  suppose  now  our  banks  of  issue  into  which,  by  supposi- 
tion, there  has  been  a  metamorphosis  of  banks  of  discount 
and  deposit,  to  be  changed  back  again  into  banks  of  dis- 

1  The  conversion  of  all  deposit  and  discount  banks  into  well-regulated  banks 
of  issue  would  produce  the  same  effect  ultimately,  as  if,  instead  of  loaning  out 
of  their  reserve  as  they  did  under  deposit  and  discount  banking,  the  same  banks 
had  made  loans  of  their  own  notes  to  the  borrowers,  and  they  had  paid  them 
out  to  the  depositors  who  now,  by  supposition,  hold  them.  Henceforth  the 
borrowers  could  not  pay  by  selling  to  other  borrowers  out  of  bank,  unless  the 
latter  borrowed  to  supply  a  producing  consumer's  market  of  the  kind  before 
mentioned,  and  but  very  little  interest  and  very  small  amounts  in  profits  could 
be  paid  over,  unless  realized  out  of  such  markets.  The  like  may  be  said  of 
wages.  The  maintenance  of  a  fixed  ratio  of  metallic  reserve  to  loans,  if  that 
be  possible,  would,  under  our  present  banking  system,  produce  approximately 
the  same  effect,  by  gradually  converting  new  loans  into  loans  of  the  former 
kind.  The  introduction  of  banks  of  issue  into  Scotland  stimulated  production 
very  greatly  for  a  time,  but  only  moderately  after  the  notes  had  taken  the 
place  of  so  much  metal. 


INDUSTRIAL  CONDITION  OF  THE  UNITED  STATES.  566 


count  and  deposit.  We  should  see  the  same  volume  of  loans 
restored  again,  and  with  it  a  full,  perfect,  and  complete  dem- 
onstration of  the  fact,  that  what  banks  loan  is  depositors' 
money,  and  not  their  own  :  if  they  loan  without  any  fixed 
limit,  they  will  cause  production,  so  far  as  their  loans  can 
aid  it,  to  go  on  without  any  limit  but  a  crisis  ;  could  they 
all  agree  upon  and  keep,  or  all  be  compelled  to  keep,  the 
same  ratio  of  reserve  to  loans,  the  effect  would  be  that  they 
would  all  stop  loaning  the  money  of  depositors  at  precisely 
the  same  point,  and  thereby  prevent  any  further  production 
from  taking  place  after  that  point  had  been  reached  in  the 
progress  of  production  on  credit  by  the  aid  of  bank  loans, 
unless,  and  only  as  producing  consumers'  markets  could  take 
the  product.  It  may  be,  and  probably  is,  impossible,  at 
present,  to  compel  banks  to  keep  the  same  ratio  of  reserve 
to  liabilities,  but  a  demonstration  of  its  necessity  is  in  or- 
der, and  I  have  given  it  in  a  variety  of  forms.  One  form 
may  convince  one,  while  another  form  may  convince  another 
reader. 

Whether  anybody  is  convinced  or  not,  all  must  admit  that 
American  labor  is  at  present  in  a  bad  case,  and  needs  a 
remedy  commensurate  with  the  cause  of  the  disease.  The 
immediate  cause  which  everybody,  when  reasoned  with, 
must  perceive,  is,  that  an  excess  of  labor  in  some  parts  of 
the  great  field  of  production  has  developed  itself,  and  that 
the  remedy  lies  in  sending  the  excess  to  other  parts  of  the 
field.  It  follows  that  the  best  remedy  of  all  would  have 
been  one  of  prevention,  by  not  allowing  the  excess  to  exist. 
That  prevention  can  by  no  possibility  be  anything  else  than 
making  it  impossible  to  support  excess  anywhere  for  a  long 
period  of  time. 

Now,  this  excess  can  only  be  sustained  by  borrowing,  to 
pay  and  support  labor,  and  the  borrowing  must  take  place 
by  loans  of  money :  the  money  must  be  loaned,  mostly,  in 
the  shape  of  bank-notes,  because  this  is  the  kind  of  money 
in  use.  Bank  reserve  is,  through  the  increasing  current  of 
deposits,  the  grand  magazine  whence  the  supply  of  money  in 
the  shape  of  notes  is  obtained,  and  sometimes  money  in  the 


566 


POLITICAL  ECONOMY. 


reserve,  handled  by  the  instrumentality  of  checks.  There 
is  no  other  plan  by  which  the  system  can  be  sustained,  for  it 
is  not  a  mere  exchange  of  credits,  without  any  results  pro- 
duced by  labor. 

A  mere  exchange  of  credits  would  be  a  childish  process : 
the  real  force  in  operation  is  production  on  credit,  for  no  re- 
sult- could  be  produced  by  a  mere  speculative  exchange  of 
credits.  There  is  something  real  in  the  case,  in  point  of  re- 
sults, and  it  is  a  want  of  harmony  in  the  exchanges  of  both 
goods  and  money,  from  want  of  balance  in  the  production  of 
the  goods.  The  ultimate  regulator  above  which  no  produc- 
tion can  proceed  beyond  certain  limits  is  the  Agricultural 
Base  Line  of  Absolute  Necessaries,  which  I  have  described 
in  the  diagram  of  Chapter  II.,  as  immovable,  while  the  other 
line  of  production  moves  within  certain  limits  above  and  be- 
low it.  The  effective  remedy  must  be  one  which,  as  far  as 
possible,  prevents  the  evil  from  arising  at  all,  and  it  lies  in 
stopping  the  supplies  coming  by  what  may  be  called  the 
payment  to  money  of  much  more  than  it  stands  credited 
with  in  commodities  through  the*  regular  exchanges,  after 
a  certain  stage  of  production  is  reached. 

If  Say's  abstract  law,  repeated  by  most  writers  in  England 
and  the  United  States,  were  practically  true,  the  industry 
of  the  United  States  would  not  be  in  its  present  predica- 
ment. A  paper  currency  issued  in  the  usual  course  by 
banks,  inscribed  bank  credits  without  any  metallic  banking 
reserve,  and  even  the  paper  of  sound  merchants  in  conven- 
ient sums,  would  answer  all  purposes,  and  would  furnish 
steady  prices,  because  there  would  be  cash  markets  for  all 
products,  and  the  amount  of  money  put  in  circulation  by 
the  issuers,  would,  within  short  periods,  be  taken  out  of  cir- 
culation by  payment  to  the  issuers.  It  is  because  Say's  law 
is  practically  false,  that  a  metallic  currency,  or  a  paper  or 
credit  currency  limited  by  a  metallic  one,  and  moving  with 
it  freely  in  exchange  for  commodities  to  be  consumed,  or 
for  labor  only  to  supply  commodities  as  fast  as  they  are  con- 
sumed, is  absolutely  necessary  in  order  to  preserve  steady 
prices.    The  expansion  of  circulation  is  paying  out  or  lend- 


INDUSTRIAL  CONDITION  OF  THE  UNITED  STATES.'  567 


ing  money,  and  contraction  is  paying  it  back  again.  A 
contraction  always  approximating  expansion,  and  at  short 
intervals  equaling  it,  would  be  the  necessary  result  of  such 
a  harmony  of  production,  even  with  a  properly  regulated 
inconvertible  currency.  Because  there  is  no  such  harmony 
and  because  production  of  certain  kinds  has  been  and  is, 
not  necessarily  and  unavoidably,  but  accidentally,  increased, 
through  the  increase  having  for  a  time  the  appearance  of 
profit,  and  because  the  owners  could  keep  it  by  the  aid  of 
bank  loans,  we  have  had  commercial  crises.  I  lay  down  the 
following  proposition,  as  embodying  the  only  practical  rem- 
edy for  the  industry  of  the  United  States :  Production  on 
credit  can  only  he  checked  hy  the  use  of  a  currency  which  will 
limit  it  short  of  a  commercial  crisis  ;  and  this  limitation  may 
come^  first  of  all,  hy  an  exclusively  metallic  currency,  without 
any  hanks  ;  secondly,  hy  such  a  currency,  without  hanks  of 
deposit-loan,  supplemented  hy  a  fixed  amount  of  hank  or  gov- 
ernment paper,  not  exceeding  half  the  whole  circulation,  and 
kept  steadily  at  that  volume  ;  thirdly,  hy  well  regulated  specie 
paying  hanks  of  issue  without  the  functions  of  deposit  and 
discount,  or  fourthly,  hy  deposit  and  discount  hanks  either 
with  or  without  the  function  of  issuing  notes,  hut  regulated 
hy  heing  required  to  keep,  and  hy  actually  keeping,  a  fixed 
ratio  of  metallic  reserve  to  liahilities. 

The  false  and  misleading  theory  of  money  as  an  active 
cause  in  itself  leads  to  the  popular  idea  that  in  times  of 
depression  of  production  and  industry  money  is  scarce  and 
everything  else  is  abundant.  Nothing  can  be  further  from 
the  truth,  and  yet  it  is  the  sole  foundation  for  the  popular 
demand  for  the  "  remonetization  "  of  silver  and  the  issue 
of  more  paper  by  the  general  government,  instead  of  the 
retirement  of  the  outstanding  surplus  of  paper,  preparatory 
to  convertibility  of  the  remainder.  Doubtless  the  produc- 
tive powers  of  the  United  States  are  great,  and  there  is 
product  enough  to  maintain  the  whole  population.  But 
the  exchanges  are  at  fault ;  and  these  are  at  fault,  because 
there  is  a  want  of  harmony  in  industrial  pursuits.  Money 
out  of  circulation  is  not  scarce  :  it  is  impossible  to  use  it 


568  ' 


POLITICAL  ECONOMY. 


as  freely  as  heretofore  in  production  of  certain  kinds,  be- 
cause the  product  already  on  hand  is  an  overstock.  There 
is  no  overstock  of  vs^heat,  however,  and  there  would  be  none, 
if  three  fourths  of  all  the  skilled  and  unskilled  labor  in  the 
United  States  were  settled  on  land.  Looked  at  in  the  light 
of  truth,  a  scarcity  of  money,  aside  from  its  use,  is  impos- 
sible. It  is  production  that  has  fallen  short,  because  there 
was  a  want  of  harmony  in  the  several  parts.  Money  in  cir- 
culation must  continue  to  be  scarce  until  production  ceases 
to  fall  short  of  consumption.  When  this  occurs,  not  money 
but  the  circulation  of  money,  will  be  abundant.  To  talk  of 
the  scarcity  of  money  is  as  contrary  to  right  reason  as  to 
say  that  an  engine  regulates  its  balance  wheel,  instead  of 
saying  that  the  balance  wheel  regulates  the  engine. 

CAPITAL  AND  COMMUNISM. 

Communism,  as  the  term  is  now  understood,  can  not  prop- 
erly be  called  a  theory  :  it  is  a  mischievous  idea,  and,  when 
developed  into  action,  destructive.  It  has  been  developed 
practically,  in  the  United  States,  out  of  the  enormous  stimu- 
lus applied  to  production,  through  the  natural  reaction  from 
the  depression  of  the  civil  war,  leading  to  a  long  continued 
expansion  of  circulation  and  prices,  increased  by  the  enor- 
mous issues  of  government  and  bank  paper  and  bank  loans. 
Communism,  as  now  understood,  could  never  have  prevailed 
to  such  an  extent  in  a  country  like  the  United  States,  with 
such  opportunities  for  the  purchase  of  cheap  land,  if  labor  to 
an  enormous  amount  had  not  been  artificially  attracted  to 
places  where  it  ought  not  to  go.  The  ingenious  but  imprac- 
ticable communism  of  Fourier  and  his  disciples  is  a  very  dif- 
ferent thing  from  that  of  the  Communists  of  to-day. 

Can  anything  be  more  absurd  to  a  practical  man  who, 
without  spending  much  time  in  reflection,  has  used  his  eyes 
to  some  advantage,  than  the  monstrous  fallacy  that  the  pos- 
session of  capital  to  lend,  is  proof  that  the  owner  of  it  is  a 
robber,  and  ought  to  be  compelled  by  taxation,  or  some  other 
method,  to  distribute  it  ?  This  is  the  extreme  communistic 
idea,  avowed  to  a  greater  or  less  extent  by  those  who  sup- 


INDUSTRIAL  CONDITION  OF  THE  UNITED  STATES.  569 


port  it.  It  is  natural  that  the  few  who  maintain  it  should 
ally  themselves  to  those  who  think  that  bankers,  manufact- 
urers and  merchants,  constituting  together,  aside  from  the 
producers  of  absolute  necessaries,  the  producing  and  mercan- 
tile classes,  are  the  cause  of  the  present  sufferings  of  labor, 
and  that  plenty  of  money,  instead  of  the  present  scarcity  of 
money,  is  needed  to  make  "  good  times." 

What  sound  argument  has  the  economic  science  of  the  day 
as  heretofore  taught,  to  say  in  opposition  either  to  those  who 
maintain  the  communistic  idea  and  boldly  avow  it,  or  to 
others  who  maintain  it  in  part  by  asserting  that  capitalists 
and  banks  are  blamable  for  not  lending  more  money,  and 
finding  work  for  idle  hands  ?  Is  not  the  science  of  the  day 
really  committed  by  its  own  doctrines,  to  affirm  that  those 
who  thus  find  fault  are  right.  Does  not  the  doctrine  of  our 
economists  condemn  by  necessary  implication  capitalists  and 
bankers  as  the  cause  of  all  the  trouble  ?  If  overproduction 
is  impossible,  there  is  no  difficulty  in  selling  all  the  products 
of  labor ;  and  it  is  a  crime  not  to  employ  those  who  want  to 
labor  and  cannot.  Again,  does  not  the  science  of  the  day 
show  that  aside  from  the  justice  or  injustice  of  making  a  bet- 
ter provision  than  now  exists,  not  only  for  the  disabled  la- 
borer who  cannot  work,  but  the  able-bodied  laborer  who  can- 
not find  it,  the  question  has  scarcely  been  discussed  at  all  ? 

If  civilization  is  at  all  desirable,  then  inequalities  of  condi- 
tion are  desirable,  because  civilization  could  not  be  main- 
tained without  them.  If  there  were  no  inequalities  of  condi- 
tion there  could  be  no  accumulations  of  capital  to  any  great 
extent  beyond  immediate  wants :  there  would  be  one  dead 
level  of  equality,  and  little  if  any  production  on  credit.  Pro- 
duction on  credit  is  the  life  of  modern  civilization.  The  prob- 
lem now  is,  how  to  limit  and  control  it  by  an  invariable 
rule,  and  not  to  destroy  it.  The  reason  why  the  theories  of 
Fourier  are  impracticable  is,  because  they  are  directly  re- 
pugnant to  the  grand  fact  on  which  all  civilization  is  based, 
and  that  grand  fact  is  accumulation  of  capital,  made  possible 
by  great  differences  of  capacity  and  condition,  and  rendered 
certain  by  the  maintenance  of  the  power  to  hold  the  accumu- 


570 


POLITICAL  ECONOMY. 


lation.  The  power  of  those  who  maintain  not  only  the  right 
to  labor,  but  to  hold  the  accumulated  fruits  of  labor,  is  more 
than  ninety  per  cent,  against  the  ten  per  cent,  of  those  who, 
while  insisting  upon  the  right  of  all  to  labor,  demand  that 
those  who  exercise  the  right  shall  divide  the  fruits  with  those 
who  refuse  to  exercise  it.  But  suppose  there  are  those  who 
are  willing  to  exercise  the  right  but  are  unable  to  do  it : 
ought  they  not  to  be  provided  for  ?  The  economical  science 
of  the  day,  as  heretofore  taught,  is  unable  to  answer  this 
question  at  all,  because  one  of  its  chief  doctrines  is,  that  such 
inability  does  not  exist.  The  only  proper  answer  which  can 
be  given,  is  one  founded,  not  upon  an  abstract  theory,  but 
upon  all  the  complex  facts  which  bear  upon  the  question. 
There  is  abundance  of  land  in  the  United  States,  and  every 
man  who  can  work  is  able  to  buy  with  his  surplus  labor 
land  enough  for  the  support  of  himself  and  family.  If  he 
buys  land  and  labors,  it  is  impossible  for  him  to  overproduce : 
if  he  and  his  fellow-laborers  go  to  cities  and  towns,  to  forges, 
factories  and  shops  in  too  large  numbers,  and  jostle  each 
other  there,  they  may  and  perhaps  will  produce  more  than 
can  be  sold  to  the  men  who  are  cultivating  land,  and  to  each 
other.  If  they  do  so,  it  is  not  the  fault  of  capitalists  or  pro- 
ducers ;  it  is  the  common  misfortune  of  these  and  the  laborers 
together.  This  is  the  true  answer  to  give  to  labor  which 
finds  itself  in  the  wrong  place,  but  it  is  an  answer  which 
economists  who  teach  that  there  can  be  no  overproduction 
are  estopped  from  giving.  While  this  is  the  true  answer, 
given  in  terms  which  labor  as  well  as  capital  can  understand, 
the  account  between  labor  and  capital  may  be  economically 
stated  in  mercantile  form,  thus  :  labor  stands  debited  with 
all  the  money  it  has  received  for  its  work  in  producing  what 
cannot  be  sold  ;  it  has  nothing  to  pay  the  debt  with,  and  if  it 
had,  would  not  be  liable  to  pay  it ;  it  must  be  paid  by  pro- 
ducing capital  up  to  the  point  where  bankruptcy  forbids  fur- 
ther payment.  Labor  loses  nothing :  it  only  suffers  because 
it  has  brought  its  wares,  for  which  it  has  been  paid,  to  a  mar- 
ket which  it  has  overstocked,  and  it  must  find  another.  It 
has  received  its  share  of  the  result  of  the  joint  efforts  of 


INDUSTRIAL  CONDITION  OF  THE  UNITED  STATES.  571 


itself  and  producing  capital  in  accumulating  overstock,  and 
for  that  reason  has  no  cause  of  complaint.  Economically 
speaking,  producing  capital,  therefore,  stands  credited  with 
labor's  share  of  profits,  which  it  has  paid  in  advance,  out  of 
which  labor  has  been  supported  for  a  long  time,  and  has  a 
surplus  left  in  savings  banks  and  elsewhere.  Loaning  capi- 
tal stands  debited  with  discount  and  interest  paid  it  in  ad- 
vance by  producing  capital  and  received  in  the  shape  of  div- 
idends, while  the  latter  stands  debited  with  profits  paid  by 
mercantile  capital  on  overstock  remaining  unsold.  The  sur- 
plus of  wages  has  gone  again  into  overstock,  and  that  of  div- 
idends and  profits  into  railroads,  municipal  improvements, 
houses,  lands,  mortgages,  and  other  investments. 

It  is  absurd,  therefore,  upon  this  plain,  unvarnished  state- 
ment of  facts,  to  speak  of  any  grievances  of  labor  :  capital  is 
the  loser,  and  not  labor.  Here  we  have  the  grand  primary 
elements  of  disturbance:  they  are  three  in  number,  —  interest, 
wages,  and  profits.  Interest  and  wages  are  the  fixed  shares 
of  two  out  of  the  three  producing  partners  paid  in  advance ; 
the  share  of  the  third  taking  the  chances  of  a  market.  The 
three  partners  are  Labor,  Producing  Capital,  and  Loaning 
Capital,  the  latter  of  which  is  the  sole  origin  and  source  of 
production  on  credit.  One  of  the  immediate  and  most  disas- 
trous of  the  results  of  this  prepayment  of  its  share  in  the 
profits  to  loaning  capital  in  the  shape  of  interest  in  advance, 
and  its  share  to  labor  in  the  shape  of  wages,  is  thus  shown  to 
be  a  transfer  of  a  large  portion  of  the  load  to  the  shoulders 
of  intermediate  producers  in  the  character  of  merchants  and 
adventurers  who  buy  of  first  producers,  and  pay  them  prof- 
its on  the  sales.  If  Loaning  capital  were  always  com- 
pelled to  wait  for  interest,  and  Labor  for  wages,  until  sales 
were  made  for  cash,  a  banking,  commercial,  and  industrial 
crisis  would  be  impossible.  Reduced  to  its  ultimate  terms  in 
results,  —  this  means  that  producing  capital  would  be  unable 
to  feed  labor  or  itself  very  long,  without  taking  account  of 
stock  and  making  sales  at  market  prices  for  cash.  The  same 
result  would  be  accomplished  in  this  manner  as  by  a  fixed 
ratio  of  metallic  reserve,  already  explained.    If  Labor  alone, 


572 


POLITICAL  ECONOMY. 


without  the  company  of  Loaning  capital,  were  compelled  to 
take  its  wages  out  of  sales  of  its  product  in  a  cash  market, 
receiving  a  stipulated  share  of  profits,  there  could  be  no  such 
thing  as  a  crisis.  Hence  we  may  say  that  labor  itself  is  the 
ultimate  cause  of  banking,  commercial  and  industrial  crises, 
because  being  unable  to  take  the  chances  of  such  a  market, 
and  requiring  for  its  support  its  share  in  advance,  —  the  cost 
of  that  support  increasing  with  the  overstock,  —  the  only 
check  to  production  on  credit  carried  to  such  excess  as  to 
cause  a  crisis,  is  one  of  prevention,  which  can  be  applied 
either  by  regulating  bank  loans  through  a  metallic  reserve, 
as  shown  in  previous  chapters,  or  by  forcing  labor  to  take 
a  fixed  shave  of  profits  out  of  sales  of  its  product  for  cash. 
Were  it  required  to  wait  for  less  than  half  its  wages,  industrial 
crises  would  either  be  prevented  or  largely  mitigated.  The 
contraction  of  labor  which  would  result  from  such  a  rule,  if 
everywhere  enforced,  would  be  a  contraction  of  production 
upon  an  extensive  scale.  The  hanking  result  would  be  the 
maintenance  within  short  periods  of  a  definite  ratio  of  bank- 
ing reserve  to  bank  loans  and  to  bank  debt.  Of  the  three 
partners.  Labor,  Producing  Capital,  and  Loaning  Capital,  La- 
bor ought  to  be  the  most  conservative,  because  it  takes  the 
least  risk  of  all  three  :  it  has  large  investments,  secured  by 
the  funded  debt  of  the  United  States,  and  would  suffer  more 
than  any  of  the  partners,  by  an  attempt  at  total  or  partial 
repudiation  of  that  debt.  Such  a  repudiation  would  be  of 
course  impossible  in  the  long  run,  because  it  would  be  only 
the  last  act  of  the  political  and  social  revolution  which  is  not 
at  an  end  yet  and  would  be  set  aside  in  the  future.  The 
United  States  can  by  no  possibility  avoid  the  payment  of  its 
debts,  according  to  their  equitable  tenor,  sooner  or  later :  its 
reputation  alone  can  suffer  by  an  attempt  which  must  neces- 
sarily prove  abortive. 


CHAPTER  XXXII. 


OUGHT  GOVEENMENTS,  OR  BANKS  IN  THEIE  BEHALF,  TO 
ISSUE  INCONVEETIBLE  CUEEENCY  UNDEE  ANY  CIECUM- 
STANCES  ? 

This  chapter  I  have  placed  last  but  one,  because  a  careful 
examination  of  all  the  subjects  discussed  is  essential,  in  order 
to  give  a  proper  answer  to  such  a  question. 

If  means  can  be  readily  obtained  by  governments  under 
great  emergencies  through  loans  made  in  convertible  paper 
or  metal,  such  loans  ought  to  be  resorted  to,  and  the  issue 
of  inconvertible  paper  ought  never  to  take  place.  The  ne- 
cessity of  resorting  to  it  does  not  arise,  as  has  been  said, 
from  any  scarcity  of  metal  existing  under  a  system  of  con- 
vertible bank-notes  and  bank  debt,  because  it  arises  equally 
in  countries  having  a  large  metallic  circulation,  —  like  France, 
for  instance.  The  stimulus  of  advancing  prices,  furnished 
by  inconvertible  paper,  although  for  the  most  part  unreal, 
has  a  powerful  effect  upon  the  thoughts  and  feelings  of  a 
people,  and  may  for  a  time  lead  to  great  energy  of  pro- 
duction in  all  directions,  and  thus  help  to  sustain  them  for  a 
time  in  carrying  on  a  great  war.  This  was  seen  in  Great 
Britain  from  1793  to  1816,  and  in  the  United  States  from 
1861  to  1865.  During  the  latter  period  great  benefit  was 
also  derived  from  maintaining  government  securities  at  par 
in  money,  although  they  had  fallen  much  below  par  in  com- 
modities. These  securities  were  at  par,  in  popular  opinion, 
because  they  seemed  to  be  at  par.  The  enormous  losses 
inflicted  by  depreciated  money  upon  creditors  were  forced 
contributions  to  hand  over  to  debtors,  while  no  apparent  loss 
was  caused  to  the  creditors  themselves. 

The  benefit  received  by  the  United  States  was  twofold ; 


574 


POLITICAL  ECONOMY. 


first,  by  the  increased  energy  of  production  through  seem- 
ingly advancing  prices  ;  and  secondly,  the  appearance  of  a 
highly  sustained  public  credit.  The  issue  was  carried  so  far 
as  to  approach  dangerous  ground,  because  the  power  of  de- 
posit loans  to  raise  prices  and  stimulate  production  was  not 
understood  by  the  government.  A  mistake  was  made  in 
making  the  funded  debt  —  principal  and  interest  —  payable 
in  metal.  Two  hundred  millions  payable  in  gold  were  suffi- 
cient, from  the  political  stand-point  of  the  time.  Sold  by 
holders,  these  would  have  found  their  way  abroad,  and  would 
have  been  enough  to  interest  bankers  and  capitalists  on  the 
side  of  the  United  States.  The  remainder  of  the  debt  and 
interest,  payable  until  after  the  reestablishment  of  converti- 
bility in  the  currency  the  United  States  might  be  using, 
when  paying  interest  or  principal,  would,  to  a  great  extent, 
have  remained  in  the  country  ;  would  have  gone  into  insur- 
ance, savings  banks,  and  other  reserves  of  capital,  thus  sav- 
ing the  country  from  many  of  the  unproductive  investments 
made  between  1865  and  1873,  through  the  sale  of  govern- 
ment debt,  to  go  abroad,  which  brought  returns,  to  be  in- 
vested in  railroads,  municipal  improvements,  etc.,  and  thus 
increased  production  upon  credit.  One  of  the  results  was  an 
enormous  expenditure  of  the  relative  necessaries  of  life  im- 
ported at  high  prices,  in  the  shape  of  foreign  goods,  some 
of  which  were  the  most  luxurious  and  costly  of  all.  But  the 
greater  part  of  the  departing  government  debt,  payable  in 
metal,  reappeared  in  the  shape  of  securities  of  a  very  dif- 
ferent order,  issued  by  railroad  and  other  corporations  to 
former  holders  of  the  government  debt  or  those  who  stood 
in  their  place.  The  result  was  the  same  as  if  the  govern- 
ment had,  by  issuing  its  debt  on  behalf  of  the  community  in 
time  of  peace,  borrowed  one  thousand  millions  or  more  of 
velv^s,  silks,  cloth,  iron,  and  other  goods,  exchanged  a  large 
portion  of  them  for  the  necessaries  of  life,  distributed  a  con- 
siderable portion  to  be  consumed  unproductively,  and  used 
the  remainder  to  build  railroads,  houses,  and  warehouses,  to 
make  cloth  and  other  goods  in  excess  of  the  ability  of  pro- 
ducing consumers  to  take.    It  was  like  a  man  buying  and 


OUGHT  INCONVERTIBLE  CURRENCY  TO  BE  ISSUED?  575 


producing,  and  at  the  same  time  consuming  largely  in  excess 
of  his  production,  upon  the  strength  of  a  mortgage  he  had 
given  upon  his  own  house.  The  loss  to  the  United  States, 
in  consequence  of  so  much  of  its  debt  going  abroad,  was 
enormous.  It  is  idle  to  repeat  the  old  fallacy  that  the 
scarcity  of  capital  in  the  United  States  made  it  desirable 
to  send  so  much  of  its  debt  abroad.  Whether  A.  can  sell 
out  his  security  which  is  yielding  six,  and  invest  the  pro- 
ceeds at  eight  per  cent.,  to  the  advantage  of  the  whole 
country,  depends  upon  whether  he  himself,  or  somebody  else 
as  his  representative  in  the  field  of  production,  will  actually 
earn  the  eight  per  cent.  If  the  eight  per  cent,  is  apparently, 
but  not  really,  earned,  because  the  earning  party  has  built  a 
warehouse,  a  railroad,  or  a  mill,  or  made  municipal  improve- 
ments which  are  not  needed  because  they  are  not  worth  half 
their  cost,  or  made  cloth  or  iron  which  cannot  be  sold,  the 
investment  at  six  per  cent,  would  have  been  better  for  the 
whole  country. 

Again,  the  public  debt  represented  a  liability  to  pay  in 
commodities  at  the  rate  of  nearly  2  for  1  received.  The 
debt  sent  abroad,  therefore,  represented  five  hundred  millions 
or  more  issued  for  no  real  value  received,  but  which  the 
United  States  were  and  are  as  much  bound  in  justice  and 
honor  to  pay,  as  if  they  had  received  full  value. 

If  A.'s  debt-of  ten  thousand  dollars  was  incurred  for  the  con- 
sideration of  goods  sold  nominally  to  that  amount,  but  really 
worth  only  one  half  of  it,  and  the  debt  is  offered  him  after- 
wards at  fifty  cents  to  the  dollar,  the  best  investment  for 
him  is  to  purchase  his  own  debt.  The  same  principle  ap- 
plies to  the  debt  of  the  United  States  ;  for  although  the  debt 
was  not  offered  directly  to  home  buyers  at  fifty  cents  to  the 
dollar,  the  retention  of  the  debt  in  the  United  States  would 
have  saved  five  hundred  millions  to  the  country  by  the  Tise 
in  value  of  the  debt,  accruing  to  the  benefit  of  citizens  at 
laome. 

Another  bad  result  followed  for  the  United  States,  and  the 
whole  commercial  world.  In  consequence  of  making  the 
debt  payable  in  metal,  a  considerable  amount  of  gold  left  the 


576 


POLITICAL  ECONOMY, 


country  wliich  would  otherwise  have  remained,  and  metal- 
lic distribution  was  disturbed,  prices  were  probably  raised 
abroad,  and  the  metal  which  must  now  be  recalled  would 
have  remained  at  home,  ready  to  make  its  appearance  upon 
the  return  of  convertibility.  But  after  making  due  allow- 
ance for  all  these  mistakes,  the  government  was  justified  in 
its  acts  by  the  necessities  of  the  case,  and  the  same  may  be 
said  of  Great  Britain  ;  but  a  terrible  reaction  was  the  result 
for  both  countries. 

France  has  given  an  entirely  different  result  under  circum- 
stances in  some  respects  very  similar,  but  in  others  quite  dif- 
ferent. France  had  no  banking  system  to  double  the  effect 
of  the  issues  by  the  Bank  of  France.  The  notes  retired  an 
amount  of  metal  equal  to  their  own  volume  ;  they  were  not 
lent  to  producers  to  any  greater  extent  than  metal  had  been 
before,  and  at  the  first  opportunity  they  were  invested  in  in- 
terest bearing  debt  in  the  shape  of  rentes.  Had  the  people 
of  France  been  like  their  neighbors  of  England,  or  like  the 
citizens  of  the  United  States,  —  had  they  possessed  a  bank- 
ing system  like  that  of  England  or  the  United  States,  with  a 
relatively  larger  part  of  their  population  engaged  in  labor 
other  than  that  which  provides  absolute  necessaries,  and  had 
there  been  less  conservatism  in  their  social  habits,  the  result 
would  have  been  very  different.  To  all  appearance  the 
notes  answered  well  the  purposes  of  the  government  and 
people,  and  did  good  service  in  paying  the  indemnity,  and 
recalling  from  abroad  the  national  debt.  Harmony,  and  at 
the  same  time  energy  of  production,  steady  national  habits, 
and  the  absence  of  banks,  maintained  comparatively  steady 
prices.  If  there  had  been  no  banks  in  the  United  States,  the 
volume  of  paper  issued  after  the  commencement  of  the  civil 
war  would  have  raised  prices,  but  the  prices  would  have  fallen 
far  short  of  the  figures  actually  reached. 

The  people  of  a  country,  nevertheless,  determine  to  a  con- 
siderable extent  the  effect  of  such  issues,  for,  with  an  incon- 
vertible currency  like  that  of  France,  the  people  of  the 
United  States  could  not,  even  without  banks,  have  main- 
tained as  perfect  steadiness  of  production  and  of  prices  as 


OUGHT  INCONVERTIBLE  CURRENCY  TO  BE  ISSUED?  577 

did  the  people  of  France,  nor  would  a  convertible  currency 
like  that  of  France  to-day  maintain  equal  steadiness  in  the 
United  States. 

On  the  whole,  it  may  be  said  that  under  trying  conditions 
governments  seem  instinctively  to  resort  to  issues  of  paper. 
The  loss  in  material  results  is  perhaps  greater  than  the  gain, 
but  to  carry  into  effect  great  undertakings  like  those  of 
Great  Britain,  the  United  States,  and  France,  the  end  woulr> 
seem  to  justify  the  means,  where  steps  to  return  to  the  nor- 
mal condition  of  a  metallic  or  duly  regulated  circulation  are 
taken  as  soon  as  possible.  The  grand  mistake  made  by  Con- 
gress, acting,  however,  no  doubt,  in  accordance  with  an  ill- 
informed  public  opinion,  was  the  repeal  of  the  joint  reso- 
lution, which  required  the  Secretary  of  the  Treasury  to  re- 
tire monthly  a  certain  amount  of  legal-tenders.  Had  Mr. 
McCulloch,  then  secretary,  been  allowed  to  proceed  with  the 
contraction,  which  he  had  himself  advised,  and  been  al- 
lowed to  inaugurate,  to  the  desired  end,  thousands  would 
have  been  saved  from  the  bankruptcies  which  have  followed 
since  1873.  Under  our  banking  system  crises  must  un- 
doubtedly come  as  regularly  as  production  on  credit  expands 
and  suffers  collapse,  but  that  expansion  which  was  then  pro- 
ceeding under  the  stimulus  of  bank  loans  and  high  prices, 
would  have  been  happily  arrested,  and  we  should  have  had 
no  crisis  until  after  convertibility  had  been  restored,  and 
then  in  a  mitigated  form.  The  industrial  expansion  on 
credit,  or  the  expansion  of  production  on  credit,  —  whichever 
one  chooses  to  call  it,  —  would  then  have  been  postponed,  to 
proceed  with  the  same  ratio  of  variation  as  actually  took 
place  under  the  inconvertible  notes,  but  with  much  lower 
range  of  prices  and  less  bankruptcy  and  national  loss. 

37 


CHAPTER  XXXIII. 


HOW  BANKING  RESERVE  OUGHT  TO  BE  KEPT. 

How  banking  reserve  ought  to  be  kept  has  been  already 
fully  discussed,  but  its  great  importance  requires  a  brief 
chapter  for  a  statement  of  the  principles  involved,  in  order 
to  catch  the  attention  of  casual  readers. 

The  principle  of  a  banking  reserve  is  founded  on  the 
economical  fact  that  deposits  are  not  the  money  of  the 
banker,  but  of  the  depositors,  so  far  as  the  production  and 
exchanges  of  the  country  where  the  banking  is  done,  are  con- 
/  cerned. 

How  the  law  may  regard  the  question  of  legal  property  is 
entirely  immaterial :  the  present  question  is :  What  is  done, 
and  what  ought  to  be  done  with  the  deposits  ?  Deposits  are 
in  their  origin,  money  received  in  exchange  for  goods  sold 
to  producing  consumers.  When  half  or  more  of  all  the 
money  in  a  country  is  banked  in  the  shape  of  deposits,  less 
than  twenty-five  per  cent,  of  the  metal  and  notes  depos- 
ited will  make  all  the  payments  of  the  depositors,  and  the 
remainder  may  therefore  be  loaned  and  kept  on  loan.  The 
twenty-five  per  cent.,  which  is  called  banking  reserve,  but 
is  really  and  truly  the  consolidated  fund  of  money  belonging 
to  depositors,  into  which  all  depositors  pay,  —  one  set  pay- 
ing and  one  set  receiving,  but  all  putting  the  money  back 
again  into  the  fund,  and  frequently  never  taking  it  out  in 
consequence  of  clearing,  —  is  the  fund  through  which  all 
the  exchanges  of  the  market  of  producing  consumers  are 
made;  all  such  exchanges  increasing  the  reserve.  On  the 
other  hand,  all  exchanges  outside  of  the  producing  consum- 
ers' market  diminish  the  reserve  by  increasing  the  amount 
of  bank  and  borrowers'  debt,  over  and  above  reserve,  be- 


HOW  BANKING  KESERVE  OUGHT  TO  BE  KEPT.  579 

cause  they  are  merely  exchanges  of  money  for  labor  whose 
products  have  not  yet  come  into  that  market.  Hence,  to 
keep  the  reserve  in  definite  ratio  to  bank  debt  is  to  allow  no 
exchanges  of  money,  for  labor,  by  means  of  bank  loans, 
in  excess  of  the  exchanges  of  producing  consumers'  mar- 
kets. But  it  will  also  have  another  effect.  It  will  cause 
to  vanish  the  illusion  that  a  bank  deals  only  in  debt,  because 
under  that  limitation  the  payments  into  the  reserve  from 
circulation  outside  of  the  bank  will  equal  the  payments  out 
of  the  reserve  into  outstanding  circulation.  The  payments 
out  of  the  reserve  into  outstanding  circulation  will,  so  far 
as  they  are  made  by  way  of  loan,  be  equaled  by  the  pay- 
ments into  the  reserve,  on  account  of  loans  paid.  It  will 
have  a  still  further  effect.  It  will  cause  all  the  gold  and 
silver  outside  of  banks  to  come  into  active  circulation  by 
the  side  of  bank-notes ;  replenishing,  and  being  replenished 
by  banking  reserve.  It  may  be  impossible  to  introduce  any 
such  regulation  of  reserve,  but  it  is,  nevertheless,  absolutely 
essential  in  order  to  bring  metallic  money  into  full  circula- 
tion by  the  side  of  paper.  The  bank  debt,  over  and  above 
reserve,  may  be  regarded  subjectively  as  a  power  or  series 
of  powers  to  work  the  reserve  by  circulating  the  metal,  or 
the  bank-notes  contained  in  it  if  there  be  no  metal.  To 
fix  a  definite  ratio  of  reserve  to  debt  over  and  above  re- 
serve is  therefore  to  fix,  by  definite  limits,  the  power  of 
working  the  reserve  through  loans.  If  the  reserve  is  reg- 
ulated, loans  are  regulated  ;  and  the  regulation  of  loans  is 
the  most  important  object  attained,  by  having  money  in  the 
reserve  at  all.  If  loans  are  not  (and  in  the  United  States 
and  England  they  are  not)  regulated  by  the  reserve,  then  all 
the  metal  in  the  reserve,  as  well  in  the  Bank  of  England  as 
elsewhere,  over  and  above  what  will  supply  actual  calls  to 
send  abroad  or  pay  out  for  circulation  at  home,  is  superfluous, 
and  might  as  well  be  locked  up,  buried,  or  sent  abroad. 
But  if  a  fixed  ratio  can  be  kept,  it  is  all  needed  to  perform 
the  twofold  office  of  supplying  outstanding  circulation,  and 
regulating  the  volume  of  loans  everywhere  throughout  the 
country. 


580 


POLITICAL  ECONOMY. 


This  regulation  would  not  produce  perfect  steadiness  of 
production  among  English-speaking  people.  There  is  an 
exuberance  of  productive  energy  which  would  counteract  it, 
even  if  they  had  such  a  money  system  as  France,  or,  in  other 
words,  the  absence  of  all  system  but  that  of  self-regulating 
machinery.  Nevertheless,  it  would,  if  practicable,  go  far  to- 
wards effecting  a  change  both  in  the  habits  of  the  people  and 
the  character  of  their  exchanges. 

The  difference  between  the  objects  attained  by  a  regu- 
lated banking  reserve  in  the  United  States  and  England 
may  be  thus  stated:  When  bank-notes  are  merely  con- 
vertible without  any  definite  reserve,  the  obligation  being 
merely  to  redeem  on  demand,  and  when  there  is  no  definite 
reserve  of  metal  to  loans  and  deposits,  bank-notes,  instead  of 
being  sent  to  the  issuing  bank  for  redemption,  and  until  they 
are  so  sent,  kept  in  their  own  hands  by  those  who  receive 
them,  go  largely  into  deposit,  and  before  the  debt  created 
against  the  receiving  bank  by  the  deposit  is  paid  to  the  de- 
positors, and  befoi^e  the  notes  are  redeemed,  "  deposits  "  thus 
arising,  through  the  deposit  of  bank  debt  in  the  shape  of 
notes,  become  a  source  of  still  further  loans.  The  receiv- 
ing bank  merely  gives  its  own  deposit  debt  for  the  time,  in 
exchange  for  the  bank  debt  covered  by  the  notes,  but  instead 
of  treating  the  deposit  as  debt,  treats  it  as  resources,  and 
by  loans  founded  upon  these  supposed  resources,  causes  pro- 
duction, already  overloaded,  to  load  itself  still  more  heavily. 
If  Adam  Smith's  law  of  a  regulated  reserve  were  clearly  per- 
ceived and  universally  applied,  such  a  result  would  be  im- 
possible. The  only  hope  for  bankers  under  such  a  variable 
reserve  lies  in  their  caution  and  prudence  ;  but  with  a  regu- 
lated reserve,  all  are  forced  to  be  conservative.  If  there  is 
no  regulated  reserve,  all  bankers  receive  such  deposits  alike : 
the  sagacious  and  prudent  discriminate  as  to  the  quality, 
and  are  cautious  as  to  the  quantity,  of  their  loans :  the  im- 
prudent and  careless  discriminate  too  little  as  to  either ;  but 
with  a  regulated  reserve,  caution,  prudence  and  sagacity, 
are,  so  to  speak,  distributed  freely  among  all  bankers,  be- 
cause prudence  has  already  been  forced  upon  the  producing 


HOW  BANKING  RESERVE  OUGHT  TO  BE  KEPT.  581 


community.  Thus,  when  a  reserve  of  twenty  per  cent,  coin 
is  rigorously  maintained  in  a  deposit-loan  bank  which  has 
deposits  to  the  amount  of  one  million  of  dollars,  the  re- 
serve standing  at  two  hundred,  and  loans  at  eight  hundred 
thousand  dollars,  if  ten  thousand  dollars  of  bank-notes  are 
sent  in  for  deposit,  they  must  be  refused  unless  accompanied 
by  two  thousand  dollars  in  coin  in  addition  to  the  notes ;  or 
unless  two  thousand  dollars  of  the  notes  be  immediately  sent 
home  by  the  receiving  bank  for  redemption  in  coin.  If  a 
loan  is  asked,  it  can  be  made  only  upon  the  condition  that 
the  market  of  consumers  has  already  returned  into  the  bank 
a  surplus  to  be  used  in  the  market  of  producers.  The  prin- 
ciple upon  which  Adam  Smith's  regulated  reserve  applies 
to  a  deposit-loan  bank,  is,  that  a  bank  deals  only  in  deposits, 
unless  it  be  regarded  as  issuing  credits.  This  is  plain  fact 
without  theory.  If  a  bank  has  no  deposits  to  loan  with- 
out trespassing  upon  its  reserve,  after  a  certain  fixed  point 
is  reached,  then  loans  ought  to  stop  until  more  deposits 
come  in. 

There  is  no  danger  from  unredeemed  notes,  on  the  other 
hand,  in  England;  the  only  question  to  be  settled  there 
by  bankers  under  a  regulated  reserve,  would  be,  whether 
they  had  deposits  enough  to  make  the  loan  asked,  within 
the  limits  of  the  rule.  In  both  countries  the  rule  would 
prevent  the  enormous  accumulation  of  overstock  before  a 
crisis,  by  checking  bank  loans  and  thereby  deposits.  De- 
posits with  such  a  reserve  could  not  have  increased  forty- 
two  millions  in  the  United  States,  within  three  years  prior 
to  1857,  and  bank-notes  ten  millions.  In  England  deposits 
could  not  have  increased  in  the  Bank  of  England  from  less 
than  eight  millions,  in  the  autumn  of  1823,  to  more  than 
ten  millions  in  the  following  February,  falling  to  nearly 
six  millions  in  the  following  August.  They  could  not 
have  increased  from  less  than  eleven  millions  in  February, 
1835,  to  more  than  fourteen  in  February,  1836,  falling  to 
less  than  eight  and  a  half  millions  in  February,  1838  ;  nor 
under  the  Act  of  1844,  when  the  circulation  was  virtually 
gold,  could  private  deposits  have  increased  from  less  than 


582 


POLITICAL  ECONOMY. 


eight  and  a  half  millions  to  nearly  nineteen  millions  during 
1846,  falling  to  less  than  seven  millions  in  1847,  had  there 
been  a  regulated  economy  of  the  "  reserve." 

The  maintenance  of  Adam  Smith's  law  is  as  essential  for 
the  Bank  of  England  and  all  other  English  banks  as  it 
would  be  were  they  banks  of  issue  only,  without  the  function 
of  deposit.  This  doctrine  is  maintained  with  a  great  deal  of 
force  by  the  author  of  "  The  Scotch  Banks  and  System  of 
Issue."  He  argues  that  to  limit  bank-notes  by  gold,  without 
at  the  same  time  limiting  bank  loans,  is  useless.  He  fairly 
demonstrates  this  proposition,  and  had  he  proceeded  to  the 
logical  conclusion  from  Smith's  law,  he  would  have  urged  a 
definite  reserve  for  all  banks,  assuming  its  practicability. 
He  certainly  could  not  have  carefully  studied  that  law,  for 
he  insists  that  inasmuch  as  there  is  no  definite  limitation 
of  bank  loans,  there  need  be  none  of  bank-notes,  and  he  is 
entirely  right  if  the  English  doctrine  (that  of  the  Bank  Act 
of  1844)  and  the  prevailing  American  doctrine  is  sound.  In 
reality,  however,  he  only  demonstrates  the  truth  of  the  doc- 
trine of  this  book,  —  that  Smith's  law  applies  to  all  banks. 
The  only  difference  lies  in  the  great  difficulty  of  applying 
it  to  English  or  American  deposit-loan  banks.  Smith's  as- 
sertion that  convertibility  is  sufficient  for  banks  of  issue,  if 
small  notes  are  excluded  (and  I  believe,  if  included),  is  cor- 
rect, but  experience  has  demonstrated  that  it  is  not  sufficient 
for  deposit-loan  banks.  The  latter  stand  or  fall  together ; 
the  former  separately  and  independently. 


INDEX. 


Abundance  of  metal,  108. 
Abundance  without  excess,  273. 
Accommodation  bills,  222. 
Adam  Smith,  129-225. 

Advantages  from  use  of  metal  as  money,  19,  20. 
Agricultural  banks,  80. 

America,  monetary  effect  of  its  discovery,  225,  226. 

American  currency,  80. 

Amsterdam,  bank  of,  office  of  coin  In,  292. 

Analysis,  of  circulation,  116 ;  rigorous,  of  expansion,  158-161 ;  of  taxation  of  money, 

321 ;  demonstration  by,  424. 
Average  price,  236. 

Balancing,  376. 

Ballast,  gold  is,  in  reserve,  221. 
Bank  acts,  English,  104,  142. 

Bank,  contraction  not  a  cause  but  a  result,  63 ;  best  kind  of,  in  the  United  States,  to 
carry  out  the  principle  of  regulated  reserve,  172,  190;  what  an  English  bank 
deals  in,  137  ;  of  issue  in  Scotland.  373. 

Bank  credits,  109. 

Bank  interest,  318. 

Bank  liabilities,  non-redemption  of,  66 ;  its  effect,  66. 

Bank  of  England,  39-44  ;  why  a  failure,  123-133  ;  suspensions  of,  302,  30-3. 
Bank  of  United  States,  function  of,  383,  384. 
Bank-notes,  16  ;  are  money,  16. 
Bank-note-redemption  reserve,  371-375. 

Banker,  a  guarantor,  206,  207  ;  does  not  loan  credit,  206,  207  ;  in  effect  loans  com- 
modities, 206,  207  ;  his  credits  and  guaranties  will  not  pay  wages,  114. 

Banking,  in  England,  39,  44,  104,  135,  142  ;  in  the  United  States,  143,  146,  164, 
165,  184  ;  crisis  of  1866,  133,  143  ;  a  common  law  right,  146  ;  the  theory  is  that 
banks  deal  in  debt,  147  ;  summary  of,  in  the  United  States,  164  ;  deposit-loan 
one  among  other  modes  of  loaning  out  of  a  reserve,  171  ;  American  and  Eng- 
lish substantially  alike,  219  ;  discount,  317  ;  loans  through,  318. 

Banking,  deposit-loan,  like  nothing  but  itself,  521;  not  a  dealing  in  credit,  219,  220; 
an  efficient  system  of  production  on  credit,  521-523. 

Banking  reserve,  what  its  total  is,  184,  185. 

Banks,  78,  153,  190 ;  do  not  deal  in  debt,  7,  8  ;  what  English  banks  deal  in,  117, 
118;  of  deposit-loan:  what  prevents  them  from  being  self-regulating,  130-132; 
combining  all  functions,  146 ;  savings,  important  part  played  by  them,  165,  166; 
of  deposit-loan,  would  be  banks  of  issue  if  they  dealt  in  their  own  debt,  184; 
what  those  of  Amsterdam  and  Venice  prove,  199 ;  national,  ought  to  be  retained, 
385;  difference  between  in  our  time  from  those  in  Adam  Smith's,  546,  547. 


584 


INDEX. 


Banks  of  issue,  128,  129,  261,  377;  why  self-regulating,  128,  129;  what  sound  banks 
of  issue  are  compelled  to  do,  145;  weak  demonstrate  weakness,  186;  how  dem- 
onstration lost,  186,  187;  conversion  of  banks  of  deposit-loan  into,  562-564. 

Barter,  271,  399^  400. 

Bills,  accommodation,  222,  223. 

Bills  of  exchange,  112;  do  not  take  the  place  of  money,  112. 
Borrowers,  under  a  metallic  circulation,  limited  by  money  of  lenders,  489. 
Bullion,  348;  ratios,  53-55;  values,  345-355 ;  how  depreciated,  356,  357;  deprecia- 
tion not  test  of  purchasing  power,  390. 

Capital,  249,  280-282;  what  it  is,  233,  287,  288;  the  chief  loser  by  the  crisis  of  1873, 
249;  banking,  unjust  discrimination  against,  251;  inequalities  of,  necessary  to 
civilization,  259  ;  fixed  and  quick,  280;  concentration  of,  no  grievance  of  labor, 
281,  282 ;  in  land  increased  by  railroads,  282 ;  instead  of  labor,  suffers  by  con- 
centration, 282,  283;  and  communism,  568-572. 

Causes,  post-auxiliary,  of  cyisis,  67,  68. 

Chaos  of  monetary  terms,  80. 

Check,  what  it  is,  196. 

Circulation,  of  money,  24 ;  may  be  artificially  increased,  24,  136 ;  three  kinds,  116  ; 
expansion  of,  caused  by  different  kinds  of  banking,  151 ;  demonstration  that 
banks  deal  in  an  extra  one  of  money,  152;  what  kind  of  money  put  in,  by  banks 
in  the  United  States,  169, 170;  benefit  of  metallic,  as  shown  by  France,  227;  con- 
traction the  result  of  a  force  paramount  to  money,  242,  243 ;  no  more  rapid  than 
that  of  commodities,  299,  300 ;  banks  give  an  additional,  to  money,  300  ;  upon 
the  average  no  excess :  why,  301 ;  variations  in  bank-note,  412 ;  expansion  of, 
has  no  reference  to  metallic  supply,  454;  expands  and  contracts  with  produc- 
tion, 455;  is  never  redundant  as  to  production,  455,  456  ;  power  of  putting  in, 
when  redundant,  455,  456;  how  expansion  of,  occurs  under  metallic  currency, 
456 ;  expansion  of,  how  limited  by  the  total  of  metallic  units,  457,  458 ;  how  lim- 
ited by  bank-notes,  457,  458 ;  always  regulated  when  deposits  are  regulated,  541. 

Clearings,  161-164;  bank,  items  of,  132;  the  fallacy  they  engender,  161-164;  Lon- 
don, 217,  218. 

Co-factors  demonstrating  loss,  63. 

Coffers,  bank,  have  abundance  for  some  purposes,  149. 

Coin,  gold,  difference  between  and  inconvertible  notes,  151;  why  exported  when 
the  bullion  of  its  units  is  undervalued,  505,  506. 

Coinage,  free  and  limited,  494,  495 ;  by  the  United  States,  494,  495  ;  monetary  con- 
gress, 496-498. 

Commerce,  a  branch  of  production  in  a  general  sense,  233;  real,  increases  bank  re- 
serve, 310 ;  and  retires  deposits  :  why,  310-312 ;  and  production  to  be  regarded 
in  the  light  of  facts  only,  368  ;  the  indirect  exchange  of  commodities,  376,  377. 

Commodity,  misleading,  18  ;  difference  between  its  value  and  that  of  money,  43-45 ; 
and  standard,  486,  487. 

Commodities,  in  equations  of  exchange,  487;  how  valued,  504;  still  valued  by  units 
as  in  barter,  504. 

Communism,  in  France,  543 ;  in  the  United  States,  544,  545. 

Compensation  for  taxes  on  commodities,  482. 

Complexity  of  the  whole  subject  of  money,  248,  249  ;  how  through  prices  it  might 

have  modified  the  crisis  of  1873,  248,  249. 
Conditions  of  overproduction,  28. 
Congress,  monetary,  496-498. 

Consumption,  unproductive,  297.  ^  , 

Contraction,  454,  474;  in  one  bank,  expansion  in  another,  430,  431;  impossible  un- 
less universal,  466 ;  what  is  real,  559. 


INDEX. 


585 


Corporations,  the  actual  control  of,  475,  476. 
Cotton,  English  investments  in  planting,  134. 

Credit,  138;  and  debt,  138;  cannot  produce  a  crisis,  207;  bank,  the  measure  of 
metallic  economy,  210;  no  excess  of,  if  measured  only  by  production,  213; 
sales  on,  244 ;  cannot  raise  general  prices,  297,  298 ;  bank  loans  of,  cannot  raise 
prices,  298;  bank  cannot  cause  overproduction,  298;  not  the  foundation  of  a 
rise,  298,  299  ;  buying  on,  comes  from  producing  on  credit,  370  ;  bank,  mistake 
of  Mill  and  Price  and  American  writers  in  reference  to,  418,  419  ;  difference 
between  mercantile  and  bank,  422,  423  ;  what  kind  of,  arises  from  bank  loans, 
422,  423 ;  mercantile.  Mill's  theory  of,  economical  facts  relating  to,  525. 

Credit,  production  on :  to  what  purposes  applied,  507 ;  its  vast  extent,  507-509 ;  the 
cause  of  commercial  crises,  510;  does  not  end  with  such  articles  as  cloth  and 
iron,  511-513. 

Credit  wages-fund,  289-291. 

Credits,  the  result  of  loaning  deposits,  109  ;  bank,  109,  118,  401,  402;  bank,  how 
they  vary  in  England,  109,  110;  transfer  of  bank  debt  only  a  register  of  what 
the  reserve  pays,  219;  expansion  of,  242;  contraction  of,  242,  243;  to  call  this 
a  cause  of  crises  is  to  call  an  effect  a  cause,  246. 

Crisis,  banking  and  commercial,  56-60;  original  cause,  56-60;  new  theory  of,  56- 
60;  of  1866,  237,  238;  of  1873,  237,  238,457-459;  of  1857,  375;  Mr.  Price's 
theory  of,  412;  what  it  is  :  not  a  proper  word  for  that  of  1873,  522,  523. 

Crises,  commercial,  causes  post-auxiliary  of,  67,  68;  consequences,  70;  progress  illus- 
trated by  diagram,  71;  what  kind  of,  circulation  causes,  83. 

Criticism,  historical,  351. 

Crops,  buyers  of,  424. 

Currencies,  fallacies  arising  from  redemptions  of,  400;  a  credit  in  bank  can  put  in 
circulation,  401,  402;  Mill's  erroneous  theory  of,  as  to  bank-notes,  402;  the  fal- 
lacies regarding,  monetary  science  has  to  overcome,  404 ;  inconvertible,  whether 
they  ought  ever  to  be  issued,  573;  a  stimulus  for  a  time,  573. 

Currency,  American  and  French,  80  ;  Michigan  and  other  Western,  80;  initial  move- 
ment of,  221. 

Debt,  the  assertion  that  banks  deal  in,  has  no  real  meaning,  147;  mercantile  con- 
version of,  by  exchange  into  bank  debt,  206;  two  kinds  of  bankers',  412. 

Debt,  bank,  the  result  of  what,  15,  16;  by  book,  not  money,  15,  16;  out  of  what 
reserve  redeemed,  164;  units  of,  what  they  are,  378. 

Demonetization,  and  monetization,  modes  of  giving  and  taking  away  conventional 
value,  196. 

Demonstration  that  bank  reserve  pays,  necessary,  46-50. 
Depositors,  how  guarantied,  294. 

Deposits,  90,  91,  164,  190,  3-37,  521;  expand  with  production,  6;  a  consolidation  of 
reserves,  7;  Mr.  Price's  theory  of,  89;  how  they  arise,  90,  91;  arise  from  pro- 
duction, 90,  91;  to  whom  they  belong  in  law,  and  to  whom  in  science,  190; 
owned  by  depositors,  190;  supposed  case  in  France,  336-838;  are  the  con- 
solidation of  a  series  of  reserves,  371;  retired  by  consumption,  375;  banks 
can  deal  only  in  these,  378;  case  supposed  in  England,  378,  379;  check  the  de- 
preciation of  bank-notes,  457-459;  they  prevent  their  redemption,  457-459;  the 
real  forces  behind,  474;  doctrine  of,  according  to  Mill  and  Price,  511;  legal  and 
real  property  in,  578. 

Depreciation,  of  labor's  products,  how  masked,  118  ;  of  one  kind  of  bullion  reck- 
oned in  another,  no  test  of  purchasing  power,  390,  391.. 
Development  of  money,  33-35. 
Discount,  what  is,  317. 


586 


INDEX. 


Dispatch,  important,  but  dangerous,  477  ;  should  be  supplemented  by  limitation,  477. 

Distribution,  artificial  disturbance  of  metallic,  causes  local  rise  of  prices,  153 ;  metal- 
lic, how  modified  by  paper  money  and  deposit  loans,  455,  456 ;  when  bank- 
notes do  not  interfere  with,  467,  468. 

Distribution  and  consumption  on  credit,  529  ;  resulting  losses,  530,  531 ;  the  remedy 
for  the  United  States,  532. 

Dividends,  523,  524 ;  and  profits  from  products  not  sold,  how  used,  523,  524. 

Economists,  defective  reasoning  of,  526,  527. 

Equations,  of  exchange,  variation  of  units  in,  487-498  ;  credit  can  no  more  enter 
into  than  confidence  or  hope,  488;  between  buyers  and  sellers,  not  made  by 
banks,  502. 

Equilibrium,  415,  416. 

Exchange,  bills  of,  and  checks  do  not  buy  unless  there  is  money  behind,  209 ;  bills  of, 
not  money,  because  not  redeemed  with  bills,  222;  system  of,  one  of  action  and 
reaction,  222,  223. 

Expansion,  of  production,  79,  435;  of  credit,  242;  measured  by  that  of  circulation, 
293;  of  production,  immense  losses  following,  436,  437;  of  circulation,  how 
limited  and  how  arrested,  454,  455;  and  contraction,  law  of,  459;  not  caused  by 
bank-notes  alone,  462,  463;  estimate  of,  through  economy  of  metal,  462;  limits 
of,  in  France,  463  ;  the  same  whether  by  gold  or  paper,  464,  465  ;  how  masked, 
465  ;  difference  between,  and  local  redundancy,  468,  469  ;  process  of,  throughout 
the  world,  469  ;  local  and  national,  469;  and  contraction,  550-552. 

Failures  of  merchants,  477. 

Fall,  of  gold,  1861-1873,  406;  of  prices,  when  disguised,  239,  240;  real,  with  ap- 
parent rise,  552. 

Fallacies,  12,  57-61,  101, 102,  231,  418-420 ;  of  the  English  Bank  Act,  101,  102 ;  the 
three  of  credit  theory,  213;  from  use  of  terms,  236,  418;  of  taxing  money,  389. 
Falsity  of  Say's  doctrine  of  production,  26,  27. 
Family,  Anglo-Saxon,  political  economy  needed  by,  188. 

France,  productive  powers  of,  well  balanced,  302,  303;  effect  of  introducing  bank- 
ing, 308,  337-343;  her  monetary  system,  332-343,  463;  secret  of  her  prosperity, 
333,  334. 

Frenchmen,  socially  conservative,  416,  417;  conservative  as  to  banks,  416,  417. 
Fund,  profit,  what  it  is,  261;  credit,  substantial  and  speculative  movements  result- 
ing from,  519  ;  credit  average,  what  it  is,  524. 

Gain  or  loss,  when  a  lottery,  261. 

Germany,  military  fine,  how  paid  to,  by  France,  332. 

Glut,  temporary,  England's  hazard,  and  that  of  the  United  States  in  respect  to,  415. 
Gold,  silver,  and  bank-notes,  distribution  of,  19,  20. 

Gold,  in  bank  reserve  may  cause  expansion,  79;  not  measured  in  value  by  labor, 
148;  value  of  debased,  mere  convertibility  cannot  restore,  265;  in  London,  not 
a  regulator,  221 ;  loans  of,  cause  production  on  credit  in  England,  277 ;  com- 
mercial demand  for,  479. 

Government,  has  no  power  as  to  price  of  commodities,  391  ;  can  change  the  unit  of 
money,  391,  392. 

Great  Britain,  peculiarly  subject  to  crises,  385,  386 ;  attempt  to  regulate  notes  by 
gold  insufficient,  385,  386 ;  banking  in  Scotland,  386. 

Habits,  and  manners,  national,  differences  of,  562-564. 
Harmony,  of  production,  103,  369 ;  want  of,  in  production,  420. 


INDEX. 


687 


Hoards,  small,  in  France,  308. 
Holders,  of  money,  203. 

Interest,  what  it  is,  250-259;  different  kinds,  252;  how  paid,  253-257;  effect  of  tax- 
ation upon,  255 ;  paid  by  producers  on  credit,  257;  when  steady,  259;  bank, 
259,  260;  fluctuations  of  bank  proves  the  unit  theory  of  money,  259;  fluctua- 
tions in,  260  ;  steadiness,  261-264,  270;  science  of,  277;  no  relation  to  volume  of 
money,  317  ;  regulation  of  by  law,  317-319 ;  bank  cannot  be  regulated  by  law, 
318;  steadiness  of,  comes  from  stead}'  production,  318,  319;  can  be  paid  to 
banks  through  additional  production  only,  318,  319  ;  lender's  share  of  profits, 
318,  538. 

Investments,  unproductive,  do  not  cause  crises,  237;  they  are  an  effect  only,  237,  238. 
Iron,  high  prices  paid  for  English,  433,  434. 
Issue,  banks  of,  in  Adam  Smith's  time,  373. 

Issues,  writers  have  not  defined  excess  of,  143 ;  whether  one  bank  can  control  those 
of  others,  143-146 ;  when  in  excess,  145,  146. 

Labor,  Adam  Smith's  theory  of,  220,  229,  230,  366  ;  no  measure  of  values,  229,  367 ; 
not  the  measure  of,  but  equalized  by  values,  229  ;  what  it  is,  233;  at  the  plow, 
238,  239;  false  ideas  as  to  its  wrongs,  241,  242;  and  raw  material  bought  with 
cash  cannot  produce  a  crisis,  257;  real  grievance  of,  295,  296;  remedy  of,  299; 
and  capital,  299,  300;  tendency  to  equality  of  compensation  of,  443;  and  capital, 
joint  grievance  of,  476. 

Laborer,  296. 

Laborers,  increase  of,  compensated,  281. 

Land,  what  is  first  cultivated,  236;  limit  to  the  productive  powers  of,  236;  why  it 
bears  so  large  a  share  of  the  burdens  of  taxation,  253,  254;  cultivation  of,  and 
rent,  305. 

Law,  maintenance  of  Adam  Smith's,  as  to  bank-notes,  581,  582. 
Lender,  the  borrower's  partner,  253. 
Liabilities,  bank,  165. 

Limitation,  principles  of  metallic,  129;  the  object  of,  144;  loss  of,  153. 
Line,  agricultural  base,  89. 
Living,  average  expenses  of,  237. 

Loans,  137 ;  furnish  money  and  not  credit,  101;  all  produce  expansion,  137  ;  bank, 
all  founded  on  credit,  but  are  not  loans  of  credit,  150,  151 ;  practical  question  to 
be  answered  before  making,  163;  equation  of  bank,  164;  bank,  211;  bank, 
made  mostly  to  producers,  211;  are  made  to  producers  of  some  kind,  221,  222; 
radical  difference  between  bank  and  other,  253,  254 ;  scale  of,  and  production 
rise  and  fall  together,  259;  the  sum  of  all  bank,  293;  what  their  total  in  Eng- 
land and  the  United  States  shows,  293;  rise  of,  carries  interest  up,  318;  by  what 
certain  rule  they  vary  in  France,  335 ;  cannot  be  increased  by  mere  consolida- 
tion of  reserves,  335-339;  few  deposit  in  France,  337,  338;  volume  of,  shows 
how  far  reserve  has  been  drawn  upon,  373;  made  to  producers  and  paid  by  con- 
sumers, 429,  430;  equation  of,  437-441;  effect  of  paying  all  bank,  464;  savings- 
bank,  513,  514;  all  production  through,  on  credit,  550. 

Loss,  not  the  cause,  but  a  result  of  a  crisis,  74. 

Losses,  disguised  in  prices,  60,  61;  national,  253,  254;  in  England  and  the  United 
States,  529. 

Luxury,  variations  in,  through  variations  in  production,  337-339. 
Malthus'  theory,  276. 

Management,  personal,  of  corporate  and  fiduciary  capital,  490. 


588 


INDEX. 


McCulloch,  Mr.,  his  policy,  77. 

Mercantile  theory,  13  ;  absurdities  of,  23,  24 ;  when  conservative  in  its  effects,  100. 
Merchants,  failure  of,  477. 

Metal,  abundance  of,  for  what  purposes,  108;  increase  of,  what  it  is,  348;  Mr. 
Price's  question  as  to,  in  banking  reserve,  380;  single  barter  relation  must  exist 
between  the  two  kinds  of,  in  order  to  use  both  as  money,  397 ;  mistake  of  theo- 
rists in  reference  to  barter  relation,  399,  400;  economy  of,  498-501. 

Metals,  precious,  when  equal  quantities  of,  would  be  used,  135 ;  principal  use  of,  con- 
trols the  subordinate,  348  ;  how  far  they  must  be  artificially  related  to  carry  out 
monetary  convention,  349;  the  simplest  principle  of  relation  necessary,  349; 
buyers  and  sellers  cannot  stop  to  estimate  their  intrinsic  qualities,  349 ;  histori- 
cal criticism  in  relation  to  use  of,  351 ;  if  equally  and  generally  used  as  money, 
would  maintain  equal  values  in  money  and  commodity,  357,  358 ;  depreciated 
by  convertible  paper,  359,  360;  average  value  of  as  money,  361;  objections  to 
coinage  of,  do  not  relate  to  purchasing  power,  362  ;  human  mind  incapable  of 
conceiving  any  relation  of,  to  all  commodities  but  that  of  units,  363,  364  ;  how 
they  ought  to  be  regarded  in  bank  reserve,  365 ;  units  of  and  bank  debt  ought  to 
be  in  proportion,  365;  if  only  once  paid,  their  units  an  abstraction,  387;  relations 
of,  by  weight,  after  demand  for  manufacture  satisfied,  397;  of  masses  remain- 
ing, valued  in  each  other,  399 ;  first  and  second  par  of  purchasing  power,  479, 
480;  distribution  of,  uniform  unless  disturbed,  480. 

Mill:  his  opinions,  244,  245;  upon  recoil  of  prices,  244. 

Mistake  of  authors  of  Bank  Act,  135,  142. 

Monetization,  193. 

Money,  unit,  9-12;  not  a  commodity,  16;  sometimes  conceals  demonstration  of  loss, 
63,  64;  one  of  its  offices  is  to  pay  labor,  87,  88  ;  how  it  acts  on  prices,  94;  greater 
power  behind  it  causes  rise  of  prices,  114,  115 ;  why  unproductive,  151 ;  metallic, 
distributed  in  tracks  of  commerce  only,  151,  152;  all  substantially  the  same,  166; 
has  no  value  except  conventionally,  194,  195  ;  what  holders  of  have  sold,  203 ; 
the  three  fallacies  at  the  bottom  of  the  mercantile  theory  of,  214 ;  return  move- 
ment of,  to  lenders  when  goods  have  been  bought  with  cash,  222;  final  test  of, 
227,  228  ;  natural  tendency  to  invent  and  use,  234;  commodity  adopted  as,  neces- 
sarily ceases  so  far  to  be  such,  234;  and  resolves  itself  into  units,  234;  all  money 
values  in  the  character  of  units  in  equations  of  exchange,  234,  235;  its  unit 
character  depreciates  all  money,  235 ;  seller  for,  credited  with  right  to  commod- 
ities, 242;  its  use  founded  on  credit,  242;  apparent  rise  of  prices  by,  242,  243  ; 
always  abundant  when  moved  b}'^  forces  superior  to  its  own,  243  ;  not  real  capital, 
250 ;  in  point  of  science,  immaterial  what  furnishes  units  of,  except  as  to  stead- 
iness, 250  ;  not  properly  taxable,  251 ;  quantity  of,  its  meaning,  259  ;  holder  of, 
when  producer  and  when  consumer,  305,  306;  taxation  of,  388;  nature  of  com- 
plex, 421,  422;  purchasing  power  of,  421,  422  ;  its  use  compared  by  Adam  Smith 
to  that  of  a  bill  of  exchange,  425-427  ;  wheat  and  rye  used  as,  448-450;  same  law 
as  to  precious  metals,  448-450  ;  what  it  proves  in  holder's  hands  under  metallic 
circulation,  490;  false  theory  of,  the  cause  of  present  condition  of  American 
labor,  567. 

Nations,  Anglo-Saxon,  what  they  require,  552,  553. 

Necessaries,  absolute,  99,  100;  cannot  be  overproduced,  99 ;  relative,  100;  absolute 
annually  consumed,  276;  absolute  must  control  relative,  368;  production  of  can- 
not be  stimulated  in  excess  of  population,  415,  416. 

Notes,  bank,  inconvertible  in  France,  24;  when  they  ought  to  be  retired,  470,  471; 
are  deposited  when  they  ought  to  be  redeemed,  471,  472;  deposited,  give  rise  to 
further  loans,  471,  472;  how  regulated  reserve  would  check  the  deposit,  473; 


INDEX. 


589 


under  five  dollars,  474;  Adam  Smith's  testimony  as  to,  481;  expansion  of,  to 
equalize  prices,  482;  not  the  cause  of  commercial  and  banking  crises,  515;  Adam 
Smith's  law  of,  540;  in  the  United  States,  547;  theory  of  writers  contradicted  by 
Adam  Smith,  547-549. 

Overproduction,  233 ;  what,  14 ;  the  cause  of  rise  of  prices,  100 ;  theory  of  impossi- 
bility of,  abstract  155-157 ;  and  true  only  in  that  sense,  157 ;  why  impossible  on 
the  average,  236,  276;  why  so  called  by  the  author,  240;  constant  repetition  of 
the  abstraction  that  there  can  be  none  :  its  effects,  245 ;  why  Say's  theory  of,  not 
surprising,  334,  335. 

Overstock,  sacrifice  of,  240,  241. 

Overtrading,  English  mind  wedded  to  the  idea  of,  87;  not  a  cause  but  a  result:  illus- 
tration, 519,  520. 
Overvaluation  of  metal  and  its  circulation,  230. 

Paper  money,  3. 
Par,  meaning  of,  484. 

Payment,  whatever  makes,  is  money,  166,  167. 

Population,  and  absolute  necessaries  abreast,  212 ;  productive,  the  proper  distribu- 
tion of,  271,  272. 

Premium,  on  gold  and  silver,  405;  is  an  accident,  because  money  is  not  a  com- 
modity, 406;  money  being  a  unit,  gold  falls  in  value  with  other  units,  406; 
Mill's  doctrine  of,  406;  gold  depreciated  by  bank  loans,  407,  408;  metallic  circu- 
lation in  England,  409;  prices  rise  and  fall  inversely  with  bank  reserve,  410, 
411;  Took's  theory  of,  410,  411. 

Price,  Mr.:  his  theory  of  deposits,  89;  his  vigorous  argument,  147;  error  of,  in 
respect  to  the  origin  of  deposits,  376. 

Price,  least  variation  in  absolute  necessaries,  215;  what  it  is,  394. 

Prices,  rise  and  fall  of,  87,  88;  from  paying  labor,  88;  opinion  of  bankers  and  others 
as  to,  99;  steady,  under  what  conditions  of  production,  153, 154;  new  theory  of, 
155;  rise  of,  comes  from  increased  circulation,  213;  depend  upon  circulation, 
221,  243;  when  steady  there  can  be  no  overproduction,  241;  steady,  prevent  fail- 
ures and  speculation,  241;  rise  of,  by  extra  circulation,  297;  necessarily  steady 
in  the  absence  of  money,  427,  428:  advance  of,  a  phantom,  437;  what  the  rise 
and  fall  of  is,  443 ;  artificial  rise  of,  481 ;  rising  scale  of,  always  succeeded  by  a 
falling  one,  489. 

Producers,  all  above  average  loans  to,  excess,  292. 

Production,  1 ;  on  credit,  2,  233;  increased  by  loans,  24;  tendency  to  overproduction, 
69,  70;  increase  of  that  of  precious  metals  will  not  raise  prices,  100;  harmony  of, 
essential,  103;  on  what  credit  founded,  119;  when  balanced  by  consumption, 
122;  effect  of,  upon  expansion  of  circulation,  122,  123;  of  absolute  necessaries, 
cannot,  like  that  of  relative  necessaries,  be  stimulated  by  rising  prices,  134; 
paramount  forces  controlling,  157;  harmonious,  167;  metallic  ratio  of,  to  mass, 
small,  232;  steadiness  of,  how  maintained,  232;  when  converted  into  overpro- 
duction and  ill-directed  production,  233;  the  foundation  of  commerce,  233;  on 
credit,  why  so  called  by  author,  240;  in  what  kind  of  vast  numbers  of  British 
and  American  workmen  engaged  between  1865  and  1873,  240;  protected,  269; 
steady  rates  of  interest  important  for,  269;  borrowed  money  pays  for  the  largest 
part  of,  270;  the  real  difference  in  the  kinds  of,  274,  275;  speculative  stimulus  to, 
214;  and  exchange,  science  of,  empirical,  277;  disturbance  of,  must  lie  in  money, 
277;  harmony  of,  the  material  point  with  any  currency,  313 ;  why  the  point  is 
obscured,  314-316 ;  gold  and  silver  have  the  same  effect  upon  as  bank-notes, 
315,  316;  record  of,  on  bank  books,  316;  how  limited  in  France,  335;  harmony 


590 


INDEX. 


of,  essential,  369;  metallic,  393,  394;  rising  prices  stimulate,  439;  cost  of,  shown 
by  deposits,  510;  regulated,  if  bank  debt  is  regulated,  518. 
Proportion,  between  written  bank  debt  and  coin,  166;  and  between  bank  debt  by 
book  and  coin,  166. 

Purchases,  outside  of  consumer's  market,  278,  279;  difference  between  those  made 
with  cash  and  borrowed  money,  375 ;  resulting  indirectly  from  bank  loans,  513, 
514. 

Quantity  of  money,  does  not  determine  prices,  18  ;  and  circulation  determine 
prices,  18. 

Railroads,  516,  517. 

Rate,  barter,  of  metals,  risk  of  hitting,  347. 

Ratio,  variation  in  metallic,  result  of  national  coinage,  445. 

Redemption,  what  fallacy  conceals  the  object  of,  191 ;  what  that  of  a  currency  is, 
200;  of  gold  by  credit,  218;  an  infallible  test  of  money,  221;  fallacies  connected 
with  :  not  an  end  in  itself,  231. 

Redemptions,  national,  of  coin,  200,  201;  local  of  money,  217;  principle  the  same  as 
that  of  all  other  redemptions,  217. 

Redundancy,  415,  416 ;  under  the  Roman  Empire  and  in  Germany,  437,  438. 

Reserve,  bank,  37,  38;  how  it  increases,  91;  would  be  needless,  if  no  overproduction, 
1(  3;  the  true  object  of,  114,  115  ;  why  it  alone  pays  all  checks,  138,  139;  office 
of,  150  ;  ratio  of,  to  bank  debt,  165  ;  the  most  important  distinction  between  dif- 
ferent kinds  of  banking,  166  ;  banking  ought  to  be  metallic,  168;  consolidation 
of  private  reserves  in,  may  cause  steadiness  of  prices  to  be  lost,  243;  steady,  its 
true  meaning,  267,  296  ;  bank,  even  metallic,  must  be  artificially  regulated : 
why,  302,  303;  bank-note,  ratio  of,  371;  bank,  ratio  of,  371,  372;  Mr.  Price's 
argument  upon,  372 ;  what  the  United  States  ought  to  do  in  reference  to  that 
of  national  banks,  381,  382  ;  loss  of,  relatively  and  absolutely,  471,  472  ;  differ- 
ence in  objects  to  be  attained  by  in  England  and  the  United  States,  580,  581. 

Reserve,  consolidated,  when  it  will  vary  as  gold  varies,  374  ;  why  variation  different 
with  loans,  375. 

Risk,  the  same  whether  gold  eagles  or  bank-notes  are  paid,  257 ;  rises  with  bank 

loans  and  carries  interest  with  it,  259. 
Risks,  the  two  kinds  of,  banks  take,  317-319. 

Say:  his  doctrine  of  the  impossibility  of  overproduction,  212,  238,  276,  334;  his 
proof  of  the  error  of  Adam  Smith  as  to  labor,  533. 

Science,  of  production  and  exchange,  84;  economical,  cannot  answer  labor's  com- 
plaints, 284,  285. 

Security  by  fixed  and  quick  capital,  388. 

Sellers  have  a  voice  with  buyers  in  fixing  prices,  330. 

Service,  what,  14. 

Set-offs,  are  not  payments,  90;  not  payment,  but  the  result  of  it,  309,  376;  have  the 
appearance  of  payment,  309,  310;  and  have  deceived  writers  in  consequence,  310. 

Silver:  its  high  utility  and  abundance,  352;  why  its  ratio  to  gold  is  so  high  as  com- 
pared with  product,  352-354;  why  French  in  circulation  has  not  lost  value,  354, 
355;  production  of,  and  gold,  397  ;  remonetization  of,  452,  453  ;  mistaken  views 
about  growing  out  of  mercantile  theor}',  534,  535. 

Silver  and  gold,  redemption  of,  420  ;  specie  par  of,  478 ;  natural  movement  of 
diverted  by  banks,  483 ;  for  what  purpose  in  demand,  536,  537  ;  being  money  of 
the  world,  all  nations  should  act  in  concert,  540. 

Smith,  Adam  :  opinion  of,  as  to  volume  of  bank-notes,  129. 


INDEX. 


591 


Smith,  Mr.,  letter  of,  447. 
Speculation,  240. 

Standard,  the  only  kind  of,  348;  born  of  commodity,  485;  of  price,  486,  487;  father 
of  Premium,  491. 

Steadiness,  the  paramount  object  of  metallic  circulation,  124;  the  true  objective  point 
in  money,  487,  488. 

Supply,  metallic,  and  distribution,  492;  has  less  influence  on  prices  than  increase  of 

banks,  492,  498. 
Surplus,  economical  test  of,  559. 

Systems,  monetary,  of  the  United  States  and  England,  74^77;  what  they  produce, 
74-77;  monetary,  of  the  United  States,  France,  and  England,  185  ;  represented 
by  inscribed  polygons  and  square,  185. 

Tariffs,  their  effect,  69,  70,  325,  326 ;  and  taxes  do  not  cause  crises,  271 ;  like  other 
taxes,  328  ;  changes  in  mode  of  collecting,  328,  329 ;  when  paid  on  credit,  328, 
329. 

Taxation,  of  money  and  bank  stock,  194 ;  heavy,  invited  by  excessive  production  on 
credit,  255,  256,  265 ;  how  assessments  for  ought  to  be  made,  265,  266 ;  modes 
of,  265,  389,  390;  the  principles  of,  265,  266;  of  mortgages,  266-268;  analysis 
of  that  of  money,  321;  of  deposits,  321-324. 

Taxes,  what  ought  to  pay,  if  it  could  be  reached,  251J  252  ;  what  those  who  live  by 
consume  most  of,  255;  on  commodities,  compensation  for,  482. 

Theories,  of  Mill  and  Price  as  to  crises,  85-87 ;  importance  of  adhering  to,  until  en- 
tirely discarded,  119. 

Theorists,  paper-money,  83. 

Theory,  mercantile,  so-called,  225,  242,  243  ^  Ricardian,  of  rent,  304,  305. 
Trade,  balance  of,  478  ;  shows  economy,  479. 
Treasure,  masses  of,  in  China,  81. 

Unit,  of  money  is  ideal,  215;  standard  in  the  United  States  is  Dollar,  215;  of  money 

intangible  and  abstract,  regarded  as  a  unit,  395,  396. 
United  States,  policy  of,  as  to  funded  debt,  201 ;  present  condition  of,  555;  ability 

of,  to  produce,  556,  557;  mistaken  policy  of,  in  respect  to  debt,  574-577. 
Units,  relations  between  coined,  and  masses  of  metal,  396  ;  all  commodities  would 

become,  under  certain  conditions,  447,  448;  limitations  of,  498. 
Usury,  how  the  idea  of  prohibiting  arose,  319. 

Utility,  absolute,  makes  any  material,  like  wheat,  unfit  for  use  as  money,  201. 
Valuation  and  exchange,  503. 

Valuations,  of  different  currencies,  how  corrected,  303,  304. 

Value,  of  a  commodity,  17,  21,  22;  conventional,  of  metal,  17;  of  metal,  how  it 
arises,  17;  and  price,  the  same,  95;  an  equation,  95  ;  intrinsic,  95,  96  ;  commod- 
ity, 96;  of  bank-notes,  96,  97;  conventional  absorbs  mercantile,  148;  of  all 
money  equally  conventional,  191,  192  ;  mathematical  necessity  of  stating  con- 
ventional in  abstract  units,  196-198;  of  wheat,  if  used  as  money,  197,  198; 
real,  why  essential  for  material  of  money,  224. 

Values,  bullion,  344-348;  of  commodities,  reckoned  in  each  other  by  units,  367;  ab- 
stract units  indispensable  for  this  purpose,  367;  the  abstract  unit  localized,  is 
money,  367;  determined  in  general  by  action  and  reaction  of  demand  and  sup- 
ply, 367;  relative,  of  materials  used  as  money,  442;  two  schools  of  opinion  upon, 
443;  can  be  expressed  in  numbers  only,  443. 

Variation,  metallic,  141;  the  true  principle  of,  140-142;  mistake  of  authors  of  Eng- 
lish Bank  Act  as  to,  141,  142;  range  of,  in  prices,  559-561. 


592 


INDEX. 


"Wages,  steadiness  of,  in  France,  242  ;  paid  labor,  before  sale  of  its  product,  285 ; 
prepayment  of,  the  cause  of  industrial  crises,  285-288  ;  soon  refunded  under 
metallic  currency,  288 ;  fund  under  a  currency  like  thatXof  France,  288,  289 ; 
credit  fund  of,  289 ;  how  they  differ  from  other  income,  289,  290  ;  fund  of  Mill, 
289  ;  how  equilibrium  between,  and  reimbursement  by  sales  of  produce  main- 
tained, 290-292 ;  how  expended,  295  ;  the  disposition  of  surplus,  295,  296. 

Wealth,  cannot  be  fairly  distributed  when  there  is  a  fall  in  prices  by  overproduc- 
tion, 241 ;  distribution  of,  in  England  and  the  United  States,  241;  not  absolute 
but  relative,  259;  highest  condition  of,  259,  260.  ' 

Wheat,  average  price,  541 ;  surplus  ought  to  remain  in  first  hands,  542. 

Wolowski,  M.,  416,  417. 

World,  commercial,  but  one  country  in  many  respects,  555,  556. 


UNIVERSmr  OF  ILLINOtS-URBANA 


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